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Mr. GATHINGS. Yes.
Mr. POAGE. The very first time I had an argument about the REA was in a store in my district in 1936. The storekeeper was asking me whether he ought to let the power company wire his store or not, because they were not going to serve anybody else there except those right down the road. On the other hand, he said the REA people said that if they came in that they would serve not only the store but all of the neighbors back in the country. I urged him to let the co-op serve all of them. That was a commercial enterprise. Mr. GATHINGS. What year was that?
Mr. POAGE. 1936.
Mr. GATHINGS. How many, Mr. Secretary, of the general stores would be included in this 330,000 figure?
Secretary FREEMAN. I do not know.
Mr. GATHINGS. That is, those who get service that would be considered industrial enterprises?
Secretary FREEMAN. To be perfectly frank, I would have to check. I really do not know the exact number.
Mr. GATHINGS. According to your statement, 150,000 additional enterprises each year will of necessity be required to be served by this newly created setup in the years ahead, in 15 years. Is that your estimate?
Secretary FREEMAN. That is our estimate of the number of new consumers added annually by REA-financed electric systems. Mr. STALBAUM. Will you yield?
Mr. GATHINGS. Yes.
Mr. STALBAUM. Those are all types of consumers, are they not?
Mr. STALBAUM. On page 5 of your statement.
Secretary FREEMAN. I do not recall the exact wording.
Mr. STALBAUM. In other words, these are not just commercial or business consumers, but all consumers if I read your testimony correctly.
Secretary FREEMAN. Yes. This would cover not just commercial enterprises but all consumers.
Mr. STALBAUM. Thank you.
Mr. GATHINGS. And these are additional customers, are they not? Secretary FREEMAN. Yes, sir.
Mr. GATHINGS. The 150,000 are additional?
Secretary FREEMAN. That is correct-additional consumers. That would be broader than just commercial enterprises.
Mr. GATHINGS. And you estimate that there will be required for both the electric and the telephone banks $11 billion of new capital in the next 15 years?
Secretary FREEMAN. That is the estimate for both the electric and telephone systems.
Mr. GATHINGS. And of that figure, $8 billion would come from the electric bank and $3 billion from the telephone bank?
Secretary FREEMAN. That is correct.
Mr. GATHINGS. That is a sizable increase over the $5,100 million that has been pumped into the present REA system in the past 15 years? Secretary FREEMAN. That is correct.
Mr. GATHINGS. So that it would be better than double?
Secretary FREEMAN. That is right.
Mr. GATHINGS. To anticipate the needs in the next 15 years?
Mr. GATHINGS. At this time, Mr. Secretary, how many of the farms in America are electrified?
Secretary FREEMAN. About 99 percent of the farms are electrified. We have about 3,300,000 farms in America, so that it would be more than 3 million farms that are electrified.
Mr. GATHINGS. So that under this new authority that is being sought here, we are going to do something else besides carry electricity to the farmers and construct telephone lines?
Secretary FREEMAN. I think that there are two tasks, carrying service to new consumers, and taking care of greatly increased loads. The bigger part of it will be the greatly increased loads.
Mr. GATHINGS. There is a necessity for increased loads?
Secretary FREEMAN. Yes, there is more use of electric power and electric equipment.
Mr. GATHINGS. There is more than just turning on the light in the barn. There is quite a lot of electricity needed for other purposes? Secretary FREEMAN. That is right.
Mr. GATHINGS. I wanted to ask you about a provision of the legislation which you support. It is the same system that is now in vogue with reference to the payment of taxes by the REA?
Secretary FREEMAN. That is correct.
Mr. GATHINGS. You do not anticipate any change whatever?
Secretary FREEMAN. No, sir. The REA-financed systems pay taxes like everybody else.
Mr. GATHINGS. They pay taxes on what?
Secretary FREEMAN. They pay taxes on all of their property just like everybody else.
Mr. GATHINGS. Would you furnish for the record, Mr. Secretary, just what taxes the co-ops are paying?
Secretary FREEMAN. Surely.
(The information requested follows:)
TAXES PAID BY ELECTRIC AND TELEPHONE SYSTEMS FINANCED BY REA In the most recent five-year period for which composite data are available, the following aggregate amounts of taxes were paid by REA borrowers. Figures shown cover all borrowers, cooperative and commercial; separate cooperative data are not available.
In most jurisdictions, REA borrowers, cooperative and commercial, pay local and state taxes on their physical properties under the same laws as are applicable to non-REA-financed systems. In fifteen states, special statutory provision is made for the assessment and taxation of rural electric cooperative property; in two of these states, rural facilities of commercial electric utilities are given the same tax treatment as those of the electric cooperatives. In eight states, special statutory provision is made for the assessment and taxation of rural telephone cooperative property; in three of these states, rural facilities of commercial telephone utilities are given the same tax treatment as those of telephone cooperatives.
FEDERAL INCOME TAXES
Most electric and telephone cooperative systems are exempt from Federal income taxes under the provisions of section 501 (c) (12), Internal Revenue Code of 1954 which provides for exemption of—
"Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses."
Electric cooperatives are considered "like organizations" by the Internal Revenue Service within the meaning of this language.
Income tax exemption is not automatic and is recognized by the Internal Revenue Service only after a cooperative has filed an application therefor. An organization that is authorized to pay or pays dividends on its stock or membership certificates as distinguished from patronage refunds or capital credits would not be eligible for exemption under section 501 (c) (12). Those systems which establish their eligibility for exemption are required to file annual information returns (Form 990) in which any change in organization or operation must be reported.
Cooperatives which do not meet the requirements of section 501(c) (12), may nevertheless pay no income taxes if, as most of them do, they operate under contracts (usually provided for in their bylaws) with their patrons by which it is agreed before the receipt of revenue from the patron that the cooperative will return to the patron, on a patronage basis, all funds received from him in excess of the cost of rendering service to him. The difference between the revenue received and the cost of service under such a contract is not treated as income of the cooperative subject to tax.
Patrons of REA-financed cooperatives which have adopted a capital credits or other patronage capital plan who use the cooperative service only for nonbusiness purposes do not have to take capital credits into account in their Federal income tax calculations. However, a patron of an electric or telephone cooperative who deducts all or a portion of his electric or telephone bill as a business expense will normally report as ordinary income in the year received any sums received as retirements of capital credits in the same proportion that payments for service had previously been deducted as a business expense. Commercial-type borrowers, of course, pay income taxes like any other electric or telephone companies.
Mr. GATHINGS. Thank you. That is all.
The CHAIRMAN. Mr. Teague of California?
Mr. TEAGUE of California. First, let me say that I have no quarrel with the basic concept of REA. As you might know, I believe that the borrowers should pay the same rate of interest as the Government pays on its borrowings. Let me also say that I am by no means anticooperative. My father was president of one of the largest cooperatives in the country for 25 years, and my brother is president of it now. But I do have considerable reservation about the attempt to greatly enlarge the concept of the REA program.
You testify that 99 percent of the farms of the country now have electricity, but that there is a need for increased loads. Has this not been the situation for at least the last 5 years?
Secretary FREEMAN. You mean: Has the load been increasing steadily? The answer is "Yes."
Mr. TEAGUE of California. I have a quote here that says that the Subcommittee on Appropriations made this comment, by its chairman, Congressman Whitten, just this year, to this effect:
I think that you will agree that in the history of the REA there has never been a loan that the administrator recommended that was not made because money was not available. Many of the applications never did have the approval of the administrator.
In other words, he was saying that the Congress always provided all of the money that was wanted. Why the big change now?
Secretary FREEMAN. I do not recall that quote, but having served as Secretary of Agriculture, I can assure you that we have not had the funds to meet all of the requests for REA loans. The amount of money needed has never been made available by the Congress. As a matter of fact, the amount of money needed has not always been recommended by the administration.
Mr. TEAGUE of California. Mr. Whitten is saying, apparently, that money is provided for all of these and that it has been funded-that any loan that the Administrator has approved has been funded by the Congress.
Secretary FREEMAN. I do not want to get into a dispute with the chairman of the Agriculture Subcommittee of Appropriations when he is not in the room. I do not think that Mr. Whitten meant to say that. I do not think that the facts will bear it out.
Mr. TEAGUE of California. Will you give us something in the record to clear that up?
Secretary FREEMAN. I will be happy to do so. I can just say that the facts are clear that there has not been recommended to the Congress or appropriated by the Congress as much money as there have been applications that were considered sound applications pending in the REA system. That is why we are seeking additional funds outside of the Government rather than from within the Government. (The information requested appears on p. 65.)
Mr. TEAGUE of California. My understanding of the present law is that there are some restrictions on loans. You mention that in your statement. Loans are authorized for rural electrification and the furnishing of electric energy to persons on rural areas who are not receiving service. Now, we propose to add 150,000 new customers, and 99 percent of the farms now have electricity. Would it be possible for loans to be made to cooperatives and other businesses, for example, in downtown Kansas City or in Springfield, Mo., or in some other area?
Secretary FREEMAN. No, I think that would not be possible.
Secretary FREEMAN. No, under the law and the wording of the bill. Mr. TEAGUE of California. My understanding is that the restrictions will be removed under the new bill.
Secretary FREEMAN. Not the restriction in the present law on moving out of the rural areas into new nurban areas; there is no removal of such restrictions. The new legislation would provide more flexibility in financing the growth of the rural systems.
Mr. TEAGUE of California. If there is a restriction in there referring to 1,500 population or 2,500 population or 10,000 population-is there such?
Secretary FREEMAN. That restriction is not continued. Since the initial REA enactment, there are many areas which are served by REA borrowers which have grown to exceed that number in population. Mr. TEAGUE of California. I realize that, and that is why I asked the question. I think the present operation has gone beyond the original concept of the REA.
One more question, Mr. Secretary. It is true, is it not, that this sum of $750 million that the Government is going to put up, so far as dividends are concerned, the Government will not receive any interest or dividends on this investment until after everybody else has received some sort of return?
Secretary FREEMAN. No. I think that under the administration's bill the dividends would be distributed to the Government first.
Mr. TEAGUE of California. I did not understand it that way.
Secretary FREEMAN. Let me check that. I think the question, frankly, is largely academic, because the only dividends that could be paid would come from earnings.
Mr. TEAGUE of California. It would not be academic.
Nevertheless, the Government is putting up $750 million and not getting any return, and that would be a subsidy of $30 or $40 million a year there, and in that section, I believe, on page 12 of the bill, it is quite clear that the Government is at the tail end of the operation, so far as receiving any dividends are concerned. That is on page 12 of the bill, beginning with line 13, starting there.
Mr. HAGEN of California. Are you talking about dividends or interest?
Mr. TEAGUE of California. Stock interest, $750 million in stock.
Mr. TEAGUE of California. I yield to Mr. Harvey.
Mr. HARVEY of Indiana. What I think the gentleman from California is saying that these repayments go into the capital fund and the money that has been previously drawing interest goes into the fund, whereupon it does not draw any interest thenceforth until it is eventually returned to the Federal Treasury. Is that correct? Secretary FREEMAN. That is correct.
Mr. BELCHER. Will you yield?
Mr. TEAGUE of California. I yield.
Mr. BELCHER. I understand that the Government is going to invest $750 million in the banks and not even get 2 percent on the $750 million?
Secretary FREEMAN. That is correct; until the banks have earnings which can be distributed. The Government is going to make this investment in the banks, and may be paid off for that investment as the loans are made and the repayments are made. That is the purpose of the Government investment, to set up and establish a privately owned controlled system of credit following the system in the Federal land banks and the Farm Credit Administration which has been so successful.