THE CO-OP TAX DODGE

Congress Should Close the Loophole

NEXT to the oil depletion allowance, the hoariest unsettled tax argument in Washington involves the virtual immunity of giant cooperatives from income taxes. More than 10,000 co-ops gross more than $13 billion a year, yet pay less than 6% of their profits in federal and state income taxes, compared with the 52% federal corporate tax alone. This year, in his budget message, President Eisenhower asked for new taxes for coops, and last week the House Ways & Means Committee started hearings on the question: How much should co-ops be taxed?

Originally, the co-ops were small, neighborhood associations set up to improve farmers' competitive position by pooling their marketing and purchasing power. When Congress in 1909 imposed the first peacetime corporate income tax of 1%, co-ops were held to be exempt as "agricultural or horticultural organizations." There were no objections, since at that time their tax advantage over other businesses was so small. Subsequently, Congress spelled it out: a co-op was totally exempt if it did half or more of its business with members and met certain other tests such as limiting dividends on capital stock to 8%. If it did not meet these requirements, it was still exempt on its regular income if it was paid out to members in cash or in shares simply allocated to them on the books. Such allocations do not bind the coops, which can redeem them in cash when and if they want to, even lose the money without a comeback from members. Only when a member finally gets cash is the co-op income taxable--at the personal income tax rate.

Virtually excused from taxation, the co-ops expanded enormously. The Farmers Union Grain Terminal Association of St. Paul, founded in 1938 with only $30,000 in capital, today has a net worth of more than $40 million, largely finances the powerful Farmers Union, which runs the propaganda machine behind the scandalous farm-subsidy program. F.U.G.T.A. pays no federal income tax. It holds 80% of its members' share of the profits until they quit farming or die. F.U.G.T.A. has not only expanded its own elevators and feed mills, but bought out privately owned, tax-paying businesses unable to compete. Since 1950, F.U.G.T.A.'s annual reports show $29 million in profits and only $9,000,000 distributed as cash to members, the rest plowed back into the business.

Many co-ops have spread far afield of agriculture, own oil wells, tankers, insurance companies, banks, paper mills, lumber yards, phone companies, hospitals and even mortuaries. The Consumers Cooperative Association, a farm organization headquartered at Kansas City, owns three oil refineries, 1,000 or so oil wells, 935 miles of pipelines, three fertilizer plants, two feed mills, a steel-fabricating plant, a paint and grease factory and a packinghouse, counts assets of $118 million. Grossing $154 million last year, Consumers had a net of $10.3 million. It paid only $1,237,000 in taxes, less than one-fourth the federal tax alone that a non-co-op would have paid on the profits.

In 1951, over bitter co-op protests, Congress tried to close the co-op loophole by providing that co-op members pay personal income taxes on allocated profits even though they got no cash. But the courts ruled against this, holding that such allocations are untaxable because, being nontransferable, non-interest bearing, and payable only at the discretion of the coop, they have no market value. To head off real tax reform, co-ops now are willing for Congress to pass a new law, forcing co-op members to pay personal income tax on allocations but keeping the organizations themselves exempt. To overcome the court objections to taxing scrip, the Treasury recommends that all exempt allocations be made in cash or in certificates that would pay a minimum of 4% interest, have a maximum maturity of three years. This would, in effect, make the scrip short-term notes, give it a value for personal income tax purposes. But many tax experts believe that this is not enough, since it would leave the co-op itself exempt from corporate tax. Thus, other proposals before Congress would subject co-op income to both corporate and personal income tax when the profits are distributed, just as the profits of corporations are taxed.

No other country grants cooperatives such tax advantages: France allows no corporate tax exemption for profits paid to members; Belgium disallows allocations; Canada and Denmark levy regular corporate taxes on a minimum of 3% to 6% of capital invested. Even on the mild Denmark plan, U.S. co-ops would pay some $90 million to the support of the U.S. Government. To many tax experts it is high time they paid. Says former Under Secretary of the Treasury Roswell Magill: "The exemption may have been necessary in the infancy of cooperatives. Now that cooperatives have come of age, it is quite unnecessary to their continued growth and health."

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