"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." The Internal Revenue Service in IT 1671, II-1 C.B. 158, held that a local association organized for the purpose of furnishing light and water to its members is a "like organization" within the meaning of section 231(10) of the Revenue Act of 1921 [prececessor of section 501(c) (12) of the 1954 Code] and was not required to file a return because of its exempt status. Section 231 (10) of the Revenue Act of 1921 which provided the exemption from tax for "like organizations" read as follows:

"Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations or a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses."

The local association which was the subject of the cited income tax ruling was found to be organized not for profit, was without capital stock, furnished electricity only to members, charged for services based on its cost of maintenance, upkeep and operations, paid no dividends and reduced the charge for services where income exceeded expenses. Although there are no regulations or court decisions specifically confirming the results reached in this ruling, it ap pears that the REA financed electric cooperatives have relied thereupon so as to justify their non-payment of federal income taxes.

Section 1381(a)(2) of the Internal Revenue Code of 1954, as amended, specifically excludes from the income tax provisions relative to cooperatives in general REA financed electric cooperatives inasmuch as such section provides that such taxing provisions will not apply to an organization “which is exempt from tax" or "which is engaged in furnishing electric energy, or providing telephone service, to persons in rural areas."

FARMERS' COOPERATIVES

A farmers' cooperative is defined in section 521 (b) of the Internal Revenue Code, as amended, as "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".

Section 1381(b) of the Internal Revenue Code of 1954 (added by the Revenue Act of 1962) provides that a farmers' cooperative shall be subject to the taxes imposed by Code sections 11 and 1201 relating to the taxing of corporations in general and the alternative tax on capital gains, respectively.

As noted previously herein, section 1381(a)(2) of the Internal Revenue Code excludes the application of the taxing provisions relating to cooperatives in general from being applied to cooperatives engaged in furnishing electric

energy.

Unlike determining the income tax in the case of corporations in general, however, section 1382 of the Internal Revenue Code provides that farmers' cooperatives in determining their tax shall be allowed, in effect, deductions for qualifying patronage dividends, for amounts paid as dividends on their capital stock, and for qualifying nonpatronage distributions with respect to earnings derived from business done for the United States (or any of its agencies) or from sources other than patronage such as investment income.

In order to prevent the earnings attributable to business activities of cooperatives in general from escaping tax as a result of the allowance to the cooperatives of deductions for qualifying patronage dividends and for qualifying nonpatronage distributions, section 1385 of the Internal Revenue Code requires the patrons to take into gross income for tax purposes the patronage dividends and nonpatronage distributions as the same is deducted by the cooperative. Thus, the net effect of such prescribed tax treatment in the case of cooperatives and their patrons is to obtain a single current tax with respect to the income of the cooperative, either at the level of the cooperative or at the level of the

patron. In the case of patrons who are not engaged in a trade or business and who receive qualified patronage dividends with respect to purchases of personal, living or family items, however, no inclusion is required in the gross income of such patrons in respect of such dividends inasmuch as such dividends are viewed as nothing more than downward price adjustments of personal, living or family items which do not give rise to income.

The foregoing provisions relating to the taxing of cooperatives in general were added to the Code by the Revenue Act of 1962 so as to insure that the earnings of cooperatives would be currently taxable either to the cooperatives or to the patrons. Prior to such Revenue Act, certain court decisions, notably the Long Poultry Farms Inc. v. Commissioner, 249 F. 2d 726 (CA-4, 1957), and B. A. Carpenter v. Commissioner, 20 T. C. 603 (1953), aff'd. 219 F. 2d 635 (CA5, 1955), held that noncash allocations of patronage dividends generally were not taxable to the patrons, although they were deductible by the cooperatives. Notwithstanding the 1962 Revenue Act which implemented the tax on current business earnings of farmers' cooperatives and cooperatives in general, the REA financed cooperatives continue to enjoy complete exemption from the federal income tax because of their exclusion from the new taxing provisions added by the 1962 Act.

Mr. POAGE. Congressman Battin, our colleague, is here for about the third time.

We are delighted to have you here with us, and we will be glad to hear from you now, Mr. Battin.

Mr. OLSON. If I may, I have a statement from the general manager of the Dairyland Power Cooperative, La Crosse, Wis., which I should like to have made a part of the record at this point.

Mr. POAGE. Without objection, it will be made a part of the record at this point.

(The prepared statement of John P. Madgett follows:)

STATEMENT OF JOHN P. MADGETT, GENERAL MANAGER, DAIRYLAND POWER COOPERATIVE, LA CROSSE, WISCONSIN

Mr. Chairman and gentlemen of the Committee, my name is John P. Madgett. and I am General Manager of Dairyland Power Cooperative, a generation and transmission co-op which is headquartered at La Crosse, Wisconsin. Dairyland furnishes wholesale electricity to 27 member rural electric distribution cooperatives serving 106,000 consumer-members in Wisconsin, Minnesota, Iowa and Illinois.

I would like to briefly review the history of Dairyland Power Cooperative to illustrate why the generation and transmission cooperatives came into existence and why they are a vital part of the rural electrification program today.

In the early days of the program, some distribution cooperatives were unable to get the lines they had built energized because of the power companies' insistence on unreasonably high rates for wholesale power. In many cases, the commercial utilities flatly refused to sell electricity to the fledgling co-ops, and the lines which they had built were "strictly for the birds" to sit on.

It was just such a situation that led to the organization of Dairyland Power Cooperative. In 1937, representatives of 10 northwestern Wisconsin distribution co-ops met to discuss a common problem. They could not buy wholesale electricity from area power companies for less than the exorbitant rate of 2 to 22 cents per kilowatt hour. Their only alternative was to form Wisconsin Power Cooperative and generate their own power from a diesel plant, which, in those days, was still an economical way to generate electricity.

Similarly, distribution cooperatives in Iowa, Minnesota and southern Wisconsin found that they could not purchase wholesale power at equitable rates. They organized Tri-State Power Co-op and built a steam generation station.

In 1941, Tri-State and Wisconsin Power Cooperatives merged to form Dairyland. Subsequently, hydro and additional steam generating plants were added to meet the growing power needs of the consumer-members of Dairyland's 27 member distribution cooperatives. In 1965, those power requirements rose to a monthly average of 773 kilowatt hours per consumer on the lines of Dairyland's member distribution systems.

Dairyland is continuously studying and utilizing the technological advances which are being made in the electric power field in order to achieve the lowest possible wholesale rate to its member cooperatives. From 1948 to 1958, when the cost of living index rose 30 percent, the cost of power from Dairyland was reduced 35 percent. During 1965, the net cost of power delivered by Dairyland to its member distribution cooperatives was reduced to 7.4 mills per kilowatt hour, which is the same as or lower than the wholesale rates charged by the commercial power companies in this region.

One cannot separate the generation and transmission cooperatives and the distribution cooperatives when considering what is necessary for the continued progress of the rural electrification program. As Senator A. S. (Mike) Monroney of Oklahoma has so aptly observed: "Without the authority to make generating and transmission loans, rural America would never have been electrified".

The existence of a dynamic and effective G&T loan program has given the distribution co-ops a vital bargaining tool in their negotiations for wholesale contracts with private power suppliers. Many mutually-satisfactory power contracts have been negotiated because the investor-owned utilities knew that the cooperatives were not solely dependent upon the power companies for wholesale electricity.

Mr. Chairman, I am pleased to report that over the years, Dairyland has worked long and hard to establish what is now a good working relationship with the private power companies in its area. As a result, Dairyland, four other power cooperatives and seven investor-owned electric utilities are cooperating in power pooling arrangements that result in substantial savings to all parties. These arrangements are based on sound economic and engineering considerations, not on differences of philosophy nor on the weakness of any of the participating power suppliers.

In addition to these power pooling arrangemens, Dairyland has joined five other G&T cooperatives, 14 investor-owned power companies, 22 municipal systems, two public power districts and one provincial system in Canada in the organization of the Mid-Continent Area Power Planners (MAPP). Its main objective is regional power planning for over-all coordinated expansion of facilities and operations, while still permitting each member to maintain its identity and integrity.

Such regional power planning has been praised by the Federal Power Commission in its recent National Power Survey as the type of arrangement which will insure maximum utilization of participating electric systems and result in lower retail rates for all consumers.

As I mentioned before, Dairyland Power Cooperative is endeavoring to obtain for its member distribution cooperatives all of the savings which can be realized through the utilization of the advancing technology in the generation and transmission field. For instance, Dairyland, in cooperation with the Atomic Energy Commission, has constructed a nuclear power station which we expect to put into operation this year.

However, it is important to keep in mind that the advancing technology calls for larger-scale generating plants and heavier transmission lines. In order for our members to benefit from the economies afforded by the new technology, Dairyland must be able to invest larger amounts of capital in larger-sized and more efficient generating plants and transmission facilities.

In view of the budgetary squeeze which has been felt by the present REA electric loan program during the past several years, it appears highly unlikely that the rural electric cooperatives both distribution and G&T-can obtain the amounts of growth capital needed to keep pace with either the technological advances of the electric power industry or the increasing use of power by their rural consumer-members.

A source of supplemental growth capital is a critical necessity for the continued progress of the rural electrification program. This is a need which cannot be postponed without a detrimental effect upon the farmers and other rural residents who depend upon the rural electric cooperatives for lights and power.

Mr. Chairman and members of the Committee, I strongly urge that you favorably report out H.R. 14000, which would set up a sound and financially feasible Bank for Rural Electric Systems. With financing available through such a cooperative Bank as a supplement to the present REA 2 percent program, the rural electric cooperatives of Wisconsin and the Nation will be able to move forward with their continuing job of furnishing adequate, low-cost, area coverage elec

tric service to the farms and other establishments which are the backbone of our rural economy.

Mr. POAGE. We are glad to have you with us, Mr. Battin.

STATEMENT OF HON. JAMES F. BATTIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MONTANA

Mr. BATTIN. Mr. Chairman and members of the committee, my name is James F. Battin. I am a Member of Congress representing the Second Congressional District of the State of Montana. My district embraces 32 counties in eastern and central Montana, with an area of 88,176 square miles. This is the largest district in the United States except for the States of Wyoming, Nevada, and Alaska, where the Member runs at large. In this vast area reside 367,701 good and hardy Montanans deriving their livelihood for the most part from an agricultural economy. There are less than four persons per square mile living in my district. Of the people in my district in 1964, 31,204 customers received 278,880,849 kilowatt hours of electricity annually from the 16 rural electric cooperatives operating therein. These cooperatives for the most part are not empire builders. They desire only to perform for their membership the function of supplying electrification to ease the burden and increase the efficiency of their labors, as well as to bring a little pleasure into their hours of leisure.

I believe the REA program as set up in 1936 to be a sound program— one which has helped bring electricity to the farmer and rancher, and it should be continued, to see that the farmers' and ranchers' needs for electricity are satisfied.

This does not mean, however, that I favor the use of this program to compete for urban and industrial loads in areas where such loads can be supplied by private utilities. The REA Act was never intended for such purpose, and it should not now be perverted to that purpose.

For that reason, I wish to express my strong opposition to H.R. 14000 and H.R. 14837.

I am sure that the National Rural Electric Cooperatives Association will disavow any such purpose. However, if they have no such intent, why is the lending power so vastly different between sections 410 of the electric bank and 610 of the telephone bank of this legislation?

In section 610, the proposed telephone bank is prevented from making loans in a State where certificate of convenience and necessity is required by a State regulatory body unless such certificate is first obtained. In States where no such certificates are required no loan can be made until the governor of the bank determines that no duplication of lines, facilities, or systems, providing reasonably adequate service will result from such loan.

Section 410 of this legislation contains no such prohibition from duplicating lines, facilities, or systems, providing adequate service so far as electric systems are concerned. It is more than a happenstance that this legislation is so differently worded in this respect when in all other respects the provisions of the telephone bank and the electric bank are identical.

I want the 16 cooperatives in my district to be able to continue in their present role of supplying electricity to the farms and ranches

of central and eastern Montana. This can best be performed, in my judgment, by a continuation of the present program under existing law. This is the desire of the cooperatives in my area. I ask that the attached newspaper articles, showing the determined opposition to this type of legislation by the cooperatives of the State of Montana, be inserted in the hearing record at this point.

May I have the unanimous consent to have these articles included in the record?

Mr. POAGE. Without objection, they will be inserted in the record. (The newspaper articles referred to follow :)

[From the People's Voice, Oct. 15, 1965]

At annual meeting in Missoula ..

MONTANA CO-OPS OPPOSE NRECA FINANCING PROPOSAL

Rural-electric co-operative leaders in Montana have expressed disapproval of a supplemental financing plan proposed by their national organization as, "not conducive to the interests of the nation's rural electric co-operatives in achieving the lowest-cost power possible for their consumer members". The plan, they said, "would result in a higher rate of interest for the rural electrification program".

The action came at the close of a two-day annual meeting of the Montana Associated Utilities, the state-wide organization of the Montana rural electric cooperatives which was held jointly with that of the Northwest Public Power Association's power use workshop, in Missoula.

TWO FINANCING RESOLUTIONS PRESENTED

Two resolutions were presented to the delegates on the question of rural electric financing, without recommendation of the resolutions committee. One was the National Rural Electric Co-operative Association proposal calling on Congress to consider intermediate financing at increased interest rates and arrangements which would make it possible to bring private financing into the program at acceptable and practical terms. The second resolution was a rejection and disapproval of the first.

In disapproving of the recommendations of NRECA, Montana rural electric leaders urged individual member systems to study the effect of higher rates of interest upon their systems, and declared the goal of the Montana Associated Utilities to be the lowest possible cost power for consumer members instead of, as phrased in the NRECA study, 'parity of rates' with the private power companies.

They further asked that Congress appropriate loan funds for the present REA program in amounts adequate for all of the needs of the nation's rural electric co-operatives.

METCALF COMMENDED

In other resolutions Montana rural electrics commended Senator Lee Metcalf's "outstanding contribution in promoting better understanding of the operations of various electric utility companies through his series on the IOUS" and urged this information be made more broadly available.

Resolved that Congress and "appropriate officials" in the state and federal governments investigate and take all actions available to them in order to develop and promote measures to provide territorial integrity among all electric systems;

Strongly supported the anti-monopoly or preference clause; commended Congressman Wright Patman of Texas for his efforts to reverse the hard money policies of the Federal Reserve Board and the Treasury Department which have resulted in artificially high interest rates;

REAFFIRM SUPPORT FOR KNOWLES PROJECT

Urged Congress to appropriate funds for such projects as Rampart Dam in Alaska, Knowles Dam in western Montana, and Crandall (Burns Creek) project;