helds, have of necessity developed efficient accounting systems and auditing services. But with a large segment of the smaller independent marketing and service cooperatives, accounting and auditing continue to be constant problems.

Regional cooperatives like the Cooperative G. L. F. Exchange, Inc., Ithaca, N. Y., and Southern States Cooperative, Inc., Richmond, Va., have many stores, dealer agencies, and branches. They have developed uniform systems of accounts for their locals and accounting control is centralized.

Consumers Cooperative Association at Kansas City is a federation of local farmer cooperatives. This organization provides an accounting and auditing department to assist local associations with their problems. Each local, however, is an independent association and is not required to subscribe to the accounting and auditing services provided by the federation.

Many of the regional Farm Bureau and Farmers' Union cooperatives have developed accounting and auditing departments to service their county and local association members. The Illinois Agricultural Association, Chicago, for many years has had a separately incorporated Illinois Agricultural Auditing Association in which participating members buy shares of stock. The service is operated on a cost basis. Other groups of cooperatives have set up cooperative auditing associations, or have arranged to use private auditing services specializing in cooperative work.

Over the years local cooperatives have shown marked progress in their business records. The accounting and auditing services developed and provided by the regionals and other firms have been of substantial value in improving business and financial practices.

exist for any other business entity under like conditions, and the United States Supreme Court has held that certainly this is true in the cooperative's dealings with third persons.12

In order for an agricultural cooperative to come within the Capper-Volstead Act, the association must be composed of "persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers;" must operate on a mutual basis for the benefit of its members thereof as producers; must conform to one or both of these requirements: (1) No member of the association may have more than one vote or (2) the association may not pay dividends on stock or membership capital in excess of 8 percent per year; and must not deal in the products of nonmembers to an amount greater in value than such as are handled by it for members.

When the Secretary of Agriculture has reason to believe that an association within the scope of the act monopolizes or restrains trade in interstate or foreign commerce to such an extent that the price of any agricultural product is unduly enhanced as a result, he may then start an administrative proceeding against the association. If, following a hearing, he finds that the facts are as suspected he may issue an order directing the association to cease and desist from monopolization or restraint of trade. The Attorney General may institute court proceedings to enforce the Secretary's order.

The Agricultural Marketing Act of 1929, as amended,13 defines a "cooperative association" which is eligible to borrow from a bank for cooperatives.14

12 United States v. Borden Company, 308 U. S. 188.

13 12 U. S. C. 1141j.

"The Agricultural Marketing Act definition is also used in determining the cooperative associations which are exempt from certain requirements of the Federal Motor Carrier Act of 1935, 49 U. S. C. 301, 303.

This definition follows the CapperVolstead Act definition on the requirement that the association be composed of agricultural producers, the ratio of nonmember business to member business, and the limitation of dividends on stock or voting rights or both. However, the definition is much broader than the one in the Capper-Volstead Act in that it covers cooperative purchasing associations and those engaged in furnishing "farm business services." It also provides that all business transacted by any cooperative association for or on behalf of the United States shall be disregarded in applying the nonmember-to-member business ratio.

The Internal Revenue Code 15 contains special provisions on the tax treatment of certain farmer associations which qualify thereunder. The requirements for qualification differ in some respects from those contained in the two definitions discussed previously. Since this subject is covered in more detail in the next section of this publication, it will not be discussed further here.

The Cooperative Marketing Act of 1926 16 directed the establishment of a division in the Department of Agriculture to "render service to associations of producers of agricultural products, and federations and subsidiaries thereof, engaged in the cooperative marketing of agricultural products, including processing, warehousing, manufacturing, storage, the cooperative purchasing of farm supplies, credit, insurance, and other cooperative activities."

Under the Act of 1926, the U. S. Department of Agriculture, through the Farmer Cooperative Service, is authorized:

1. To acquire, analyze, and disseminate economic, statistical, and historical information, regarding the progress, organiza

tion and business methods of cooperative associations in the United States and foreign countries.

2. To conduct studies of the economic, legal, financial, social, and other phases of cooperation, and publish the results thereof. Such studies shall include the analyses of the organization, operation, financial, and merchandising problems of cooperative associations.

3. To make surveys and analyses if deemed advisable of the accounts and business practices of representative cooperative associations upon their request; to report to the association so surveyed the results thereof; and with the consent of the association so surveyed to publish summaries of the results of such surveys, together with similar facts, for the guidance of cooperative associations and for the purpose of assisting cooperative associations and developing methods of business and market analysis.

4. To confer and advise with committees or groups of producers, if deemed advisable, that may be desirous of forming a cooperative association and to make an economic survey and analysis of the facts surrounding the production and marketing of the agricultural product or products which the association, if formed, would handle or market.

5. To acquire from all available sources information concerning crop prospects, supply, demand, current receipts, exports, imports, and prices of the agricultural products handled or marketed by cooperative associations, and to employ qualified commodity marketing specialists to summarize and analyze this information and disseminate the same among cooperative associations and others.

6. To promote the knowledge of cooperative principles and practices and to cooperate, in promoting such knowledge, with educational and marketing agencies, cooperative associations, and others.

7. To make such special studies, in the United States and foreign countries, and to acquire and disseminate such information and findings as may be useful in the development and practice of cooperation.

Brief references to other important Federal statutes which specifically mention farmer cooperatives follow:

on

The Packers and Stockyards Act,17 enacted in 1921, provides for public regulation of commission men stockyards and requires that the lawful rates established be collected and retained, except that "this shall not prohibit a cooperative association of

" 7 U. S. C. 207 (f).

producers from bona fide returning to its members, on a patronage basis, its excess earnings on their livestock, subject to such regulations as the Secretary (of Agriculture) may prescribe."

Section 4 of the Robinson-Patman Act,18 enacted in 1936, provides that limitations on price discriminations shall not prevent "a cooperative association from returning to its members, producers, or consumers the whole, or any part of, the net earnings or surplus resulting from its trading operations, in proportion to their purchases or sales from, to, or through the association."

Several statutes have dealt with the right of cooperative associations of producers of agricultural products to have duly authorized representatives admitted to boards of trade and exchanges on which agricultural products are bought and sold.1 These statutes have also provided for recognition of the distinct character of patronage refunds of cooperatives in the rules of such boards or exchanges.

19

The Securities Act of 1933 exempts securities issued by a farmer cooperative association which meets the definition contained in certain sections of the Internal Revenue Code.20

The Agricultural Marketing Agreement Act of 1937 21 provides:

The Secretary, in the administration of this chapter, shall accord such recognition and encouragement to producer-owned and producer-controlled cooperative associations as will be in harmony with the policy toward cooperative associations set forth in existing Acts of Congress, and as will tend to promote efficient methods of marketing and distribution.

Although additional statutes are in effect, the ones referred to clearly show the Congressional policy toward farmer cooperatives.

THE

'HE Internal Revenue Code of 1954, as enacted on August 16, 1954, contains special provisions on the tax treatment of certain farmers associations which qualify as provided thereunder. Those qualifying may operate so as to have little or no taxable income. Associations which do not so qualify (and more than half of the existing associations do not) are liable for income tax to the extent that their receipts are sufficient to permit the payment of a return on capital and to the extent that they have receipts which they are not under a contractual obligation to return to patrons.

This brief discussion will point out some of the more important phases of the statutes and regulations on this subject.

For Marketing and Farm Supply Cooperatives. The pertinent sections of the Internal Revenue Code of 1954 relating to marketing and farm supply associations are as follows:

SEC. 521. Exemption of farmers' COoperatives from tax

(a) Exemption from tax.-A farmers' cooperative organization described in subsection (b) (1) shall be exempt from taxation under this subtitle except as otherwise provided in section 522. Notwithstanding section 522, such an organization shall be considered an organization exempt from income taxes for purposes of any law which refers to organizations exempt from income taxes.

(b) Applicable rules

(1) Exempt farmers' cooperatives.-The farmers' cooperatives exempt from taxation to the extent provided in subsection (a) are farmers', fruit growers', or like associations organized and operated on a cooperative basis (A) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (B) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses.

(2) Organizations having capital stock. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed

at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association. (3) Organizations maintaining serve. Exemption shall not be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose.

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(4) Transactions with nonmembers.— Exemption shall not be denied any such association which markets the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, or which purchases supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 percent of the value of all its purchases.

(5) Business for the United States.Business done for the United States or any of its agencies shall be disregarded in determining the right to exemption under this section.

SEC. 522. Tax on farmers' cooperatives(a) Imposition of tax.-An organization exempt from taxation under section 521 shall be subject to the taxes imposed by section 11 or section 1201.

(b) Computation of taxable income

(1) General rule.-In computing the taxable income of such an organization there shall be allowed as deductions from gross income (in addition to other deductions allowable under this chapter)—

(A) amounts paid as dividends during the taxable year on its capital stock, and

(B) amounts allocated during the taxable year to patrons with respect to its income not derived from patronage (whether or not such income was derived during such taxable year) whether paid in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or in some other manner that discloses to each patron the dollar amount allocated to him. Allocations made after the close of the taxable year and on or before the 15th day of the 9th month following the close of such year shall be considered as made on the last day