Statements on Introduced Bills and Joint Resolutions S785

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

By Mr. BAUCUS (for himself, Mr. GRASSLEY, Mr. DASCHLE, Mr. COLEMAN, Mr. HARKIN, Mr. CRAIG, Mr. JOHNSON, Mr. BURNS, Mr. DORGAN, Mr. ROBERTS, Mr. DAYTON, Mr. FITZGERALD, Mrs. LINCOLN, Mr. COCHRAN, Mr. HAGEL, Mr. CONRAD, and Mr. HATCH):

S. 785. A bill to amend the Internal Revenue Code of 1986 to allow the payment of dividends on the stock of cooperatives without reducing patronage dividends; to the Committee on Finance.

Mr. GRASSLEY. Mr. President, the Dividend Allocation Rule, DAR, is the result of several old court cases and subsequent IRS interpretation that applies only to cooperatives which are corporations. When a non cooperative corporation pays a dividend to its shareholder the corporation pays tax on the dividend issued and the shareholder pays a tax on the dividend received, so they pay two levels of taxation. In fact, under the President's dividend exclusion proposal as presented to the U.S. Congress, the President of the United States makes a compelling argument that being taxed twice is inherently unfair and it would be good for the Nation's economy that only one level of tax should be paid by the corporation and that the shareholder would receive the dividend tax free.

Well—if two levels of taxation on corporations and their shareholders is unfair and adverse to the creation of capital and the economy—how would you like to try to operate as a fiscally sound business entity if you had to figure out every day how you were going to generate enough cash flow to pay THREE levels of taxation.

Current law requires corporate cooperatives to treat income from their member-owners, patrons, separate from income of their non-members money. Contributions and earnings used by the cooperative to operate is typically called retained patronage. The member, unlike a shareholder, has to pay income tax on that amount even if the Cooperative retains the money for operation expenses. Then, because of the IRS' rules, when the Cooperative returns money to its non-members it loses its corporate deduction which in turn reduces the return of earnings that the patron has already paid taxes on—the result is a triple layer of tax. This rule is inherently unfair to our corporate cooperatives.

Now is the time to finally correct this injustice. The Congress passed this bill in 106th Congress, but it was subsequently vetoed by the President. It was a part of a bill I sponsored the "Tax Empowerment and Relief for Farmers and Fishermen, TERFF, Act" in the 107th, and now it is time for the Senate to pass it again in the 108th. As Chairman of the Finance Committee, I am proud to join with my Ranking Member MAX BAUCUS to introduce the bill to repeal the Dividend Allocation Rule. We have been joined by many of our farm States' Senators in a truly bipartisan effort to correct this financial injustice.

The time to act is now and this bi-partisan legislation will eliminate the adverse tax problem and will help rejuvenate over 100 of our farmer cooperative networks in Iowa and nearly 3000 of our cooperatives across the America.