(Thereupon the subcommittee recessed, to reconvene at 2 p. m.) AFTERNOON SESSION (Pursuant to the expiration of the noon recess, the subcommittee reconvened at 2 p. m.) Chairman PLOESER. The committee will come to order. Mr. BALLINGER. Mr. Chairman, a gentleman by the name of Ray A. Beck, general manager of the Charles Ford Co., of Watsonville, Calif., came down yesterday, thinking the committee would hold hearings at that time and that he could appear as a witness. He telephoned the hotel and I told him that the hearing had been postponed. He said that on account of business he simply could not stay over until today but he agreed to have his statement mimeographed in the hopes that it would be inserted in the record. I have his statement here. Chairman PLOESER. Without objection, it will be made a part of the record. STATEMENT OF RAY A. BECK, GENERAL MANAGER, CHARLES FORD CO., WATSONVILLE, CALIF. Mr. BECK. My name is Ray A. Beck, general manager of the Charles Ford Co. of Watsonville, Calif., a corporation. We have been in the hardware business for 95 years. This store was started 95 years ago as a country general store. Our store now carries a complete department store line of merchandise, including hardware, electrical appliances, paint, and so forth, all of which we sell in direct competition to the Watsonville Farmers Cooperative. I am submitting the following statement and ask that it be inserted in the record: I arrived in San Francisco, Wednesday morning, with the intent and purpose of appearing personally before the committee, Thursday morning. Upon arrival in San Francisco I found the hearing had been postponed for a day and it is absolutely impossible for me to stay over. I have very firm convictions regarding the unfair competitive advantage that all cooperatives enjoy under the tax exemption provisions of the Internal Revenue Code as it applies to the corporation income tax. In the past 12 months, we have been remodeling our present store and we intend to continue with this program as rapidly as funds are available. We are now and have been, during the war years, severely handicapped as have all other tax paying businesses by the heavy drain on all our earnings by Federal corporate income and excess profits taxes. During the 95-year history of this company, expansion and growth has always take place out of earnings. The total Federal tax bill during the war period, including the excess-profits taxes, exceeded 80 percent, which left us practically nothing for increased working capital at a time when inventory costs were rising very rapidly as the inflation spiral got under way. Even last year when there was no excess profits tax, our Federal corporation tax was $63,042.50. We need this money just as badly as the Watsonville Farmers Cooperative. They are now saving this tax bill and reinvesting it in an expansion program which is right now receiving considerable attention and publicity in the city of Watsonville. I have been following the reports on the hearings held by this committee in Washington and Seattle with considerable interest. One point that cooperative leaders and Congressman Patman seem to be confused on, and a point that is very vital to this entire question, is the relationship between the cooperative member and his association. The only exemption that I know of in the Federal tax laws as they apply to cooperatives is in the Federal corporation income tax sections and the only tax exemption that I feel works a competitive hardship on private tax paying business is that of cooperative corporations as compared with private tax paying business corporations. As I stated before, during the war years, our corporation income and excess profits taxes exceeded 80 percent. One of the penalties we pay for the privilege of limited liability on the part of the owners of our corporation is the high corporation tax rates that are assessed against us. Cooperatives are incorporated for exactly the same reason, namely, the privilege of limited liability on the part of their owner members. Many cooperative leaders and others who favor the continuation of their tax exemption privileges, try to picture them as being really a multipartnership. They claim also that they pay taxes on their profits in the same manner and to the same extent as a partnership or individual proprietorship, and that it would be an unjust hardship to apply the law as it now applies to private business corporations to a cooperative corporation and its members; taxing its earnings first in the hands of the corporation and then again in the hands of the members after the residue earnings are distributed. All of the cooperative corporations that I have known anything about, buy and sell in their own name as a corporate entity and do not resemble, in any way, a partnership association. They buy and sell in their own name. Their board of directors is completely responsible for hiring and firing the management and the management, in turn, is responsible to the board of directors and not the individual members. A manager of a partnership is always responsible to the 2 or 5 or 10 partners, and from a practical standpoint, it would be utterly impossible to manage a cooperative corporation of 1,000 members with 1,000 partnership bosses. This point seems to me to be very clearly proven by the fact that every cooperative association that I have heard of has been incorporated. In closing I would like to say that I believe the thing that has made America great, the thing that made it possible for this Nation of one hundred and forty-odd million people to out-produce all the rest of the world put together in the closing years of the war, was the American free enterprise system of doing business. Under the free enterprise system, as we have known it in America during the past 150 years, an individual can go into any business he sees fit and expect to receive, as a reward for his efforts, income or earnings in proportion to the amount and efficiency of those efforts. Under the cooperative system, as I understand it, no one individual can own any business. It is a form of collectivism in which no individual can own anything and all individuals who work for the cooperative must, of necessity, be hired hands. I am very vitally concerned about what will happen to individual initiative in the not too distant future when, due to special privileges including tax exemption and many other privileges conferred upon cooperatives, as such, they may constitute the major portion of the American business system. I feel that one of the things that is crippling the rest of the world is that no other nation is today freely rewarding individual initiative under the private enterprise system and I urge this committee to seriously consider the social implications that may result from the special privileges now being granted a certain class of business, to the exclusion of all other classes. The privi leged class is bound to prosper and grow at the expense of the other classes until it dominates the very government that first extended to it these privileges. I do not have any objection whatsoever to cooperatives. As competitors, I believe they have every right to engage in any type of business in a free America, the same as I do. I object only to the privileges that have been granted them by the Government, tax-wise or otherwise, and I feel that if they are put on the same footing as private business and are required to play the game by the same set of rules, that no businessman will have any further grounds for just complaint. TESTIMONY OF WILLIAM N. KEELER, SUN-MAID RAISIN (Whereupon, the witness was duly sworn.) Mr. BALLINGER. Do you wish to bring your comptroller forward with you? Mr. KEELER. No; I do not think it will be necessary. Mr. BALLINGER. What cooperative are you an officer of? Mr. KEELER. May I say just a word? I would like very much, if I may, to read this afternoon a brief statement into the record, merely covering the nature of our organization. I believe it may be helpful in connection with the subsequent examination. Chairman PLOESER. You may proceed. Mr. KEELER. I thank you. Mr. BALLINGER. You are the general manager of the Sun-Maid Raisin Growers of California? Mr. KEELER. I am the general manager, yes. Sun-Maid Raisin Growers of California was organized in 1923 as the successor of previous cooperative organizations formed for the purpose of providing processing and distribution facilities for the producers of California raisins; the need for such grower-owned and controlled facilities having been demonstrated over a period of many years during which growers were unable to obtain prices justifying their costs of production. Primarily through the efforts of the present raisin cooperative and its predecessors the grading and processing of raisins has been standardized and markets for California raisins pioneered throughout world. During the last 25 years the cooperative has expended in the excess of $20,000,000 in the advertising of the grower-owned SunMaid brand and as a result has established California raisins as a standard food ingredient in this and many other countries. Membership in the cooperative is composed entirely of raisin growers. Such membership is evidenced by membership certificates, which entitle each grower to equal voting rights and to equal interest in the organization, other than that represented by specific revolving fund credits, based upon the amount of product marketed through the association. The membership is divided into 25 geographical districts. In each district members annually elect an advisor, who represents that district on the advisory council of the organization. This council meets once each month and receives a detailed report from the management upon the operations of the organization and upon association and industry problems. Thereafter, each advisor passes on such reports at membership meetings regularly held in each unit. This report is amplified by a letter mailed monthly to each member of the organization, which letter summarizes the report given to the advisory council. At a regular annual meeting the advisors elect nine directors of the association (three each year for 3-year periods). Directors are in all instances grower-members of the cooperative and they assume the usual duties and responsibilities and exercise the same authority as is ordinarily the case in connection with corporate directors. The general policies of the organization are determined by the board of directors with the recommendation and advice of the advisory council. Sun-Maid Raisin Growers of California has no capital stock. Its fixed and working capital is provided through deductions from the proceeds of sale of members' raisins. These deductions are made on a per-ton basis and are revolved back to the members pursuant to definite and specific provisions of the organization's bylaws. The raisins which the cooperative processes and markets are delivered to it by individual grower-members under the provisions of uniform crop contracts existing between each individual member and the organization. As consideration for the processing and distribution of these products, the member is charged only the actual cost of operation, plus deductions for fixed and working capital revolving funds-which are revolved back to him-plus necessary charges for depreciation and other similar purposes. Sun-Maid Raisin Growers of California has qualified for and received exemption from income taxes under appropriate provisions of the Internal Revenue Code and regulations applicable thereto. I may add that there are about 3,000 raisin growers members of our organization and that their average holdings are between 20 and 25 acres. I would like to add, if I may, one or two words to amplify my statement a little bit. As I believe as clearly stated here I would like to accent it-the organization handles only the raisins of its own members. That is, receives, sorts, processes those raisins. It does not make purchases for its members. It carries on no other business. The chairman this morning, I believe, made the statement that the interest of your committee is primarily in the competitive factors of cooperatives, among others, upon other organizations, and particularly upon small business. I think I may state without danger of denial or of qualification that the raisin business is extremely competitive. It is made up of a substantial number of packers; in fact, the number of small packers far exceeds the number of large ones. Chairman PLOESER. Is that true so far as volume of business is concerned? Mr. KEELER. I can give you readily the figures. Our organization handles approximately 30 percent of all the natural raisins. We do not handle bleached raisins, which is another segment. With bleached raisins included, we would handle 25 percent of the entire crop. Also, there are three or four large commercial concerns who handle business, an additional 35 or 40 percent, something in that neighborhood, and the balance would be handled by a large number of small commercial concerns. Mr. Ballinger this morning-I took these notes rather hurriedly, and if I have misinterpreted you in any way, I am sure you will correct me gave, as I noted here, eight indicia of a typical agricultural cooperative. I would like to go through those very briefly in the light of the statements I have just made to you. Mr. Ballinger, you have this list there and if I do not interpret correctly you will check me. Chairman PLOESER. Do you agree with him? Mr. KEELER. May I go through them first? Chairman PLOESER. I thought maybe you had some others to add to them. Mr. KEELER. That would be possible. But I would like to go through these, Mr. Chairman, and I hope I can show our own organization does fit those points remarkably well. First, organized by individual farmers. That is the case with our organization exactly. Second, owned by individual farmers or by another cooperative which in turn is owned or controlled by individual farmers. I believe the statement indicates that is exactly the case in our instance. Third, controlled by individual farmers by democratic voting, preferably one vote per farmer irrespective of amount of participation in deliveries. That is exactly our situation. Each member has one vote regardless of the amount which he delivers. The amount which he delivers, of course, does govern his participation in the withholdings and those in the revolving funds but not in voting or in the control of the organization. Mr. BALLINGER. Do you have any preferred stock? Mr. KEELER. No; we do not. I will go into that in detail if you wish to ask questions. Mr. BALLINGER. I was going to ask you the question, no matter how much preferred stock you had, there would be one vote. Mr. KEELER. The preferred stock which we did have, which is practically eliminated, does not have any voting rights. Fourth, ease of admission at low cost or none. We have no charge for admission. The rolls are open practically all of the time. They |