[Congressional Record Volume 149, Number 54 (Thursday, April 3, 2003)]
[Senate]
[Pages S4835-S4837]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      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. BAUCUS. Mr. President, today I am introducing a very important 
piece of legislation to modify the cooperative dividend allocation 
rule. I would like to thank Senator Grassley and my other colleagues 
that have signed on the bill for their support for correcting this 
rule.
  America's agriculture industry has not had it easy in recent years. 
In Montana and other areas of the country, drought, low prices and the 
economic downturn have hit our farms and ranches hard. Over the past 
few years Congress has worked diligently to help our Nation's smaller 
agriculture producers. However, there is more work to be done.
  Senator Grassley and I recently introduced ``The Tax Empowerment and

[[Page S4837]]

Relief for Farmers and Fisherman Act'', TERFF, with the intention of 
giving farmers the tools to help themselves. One provision within that 
Act deals with the payment of dividends on cooperatives' stock. Today 
we are introducing that provision on its own to emphasize the 
importance of changing the dividend allocation rule.
  Currently, the dividend allocation rule reduces patronage income when 
a cooperative pays a dividend on capital stock from non-patronage 
earnings. This reduces the amount cooperatives can pay back to their 
farmer patrons and inhibits their ability to equity-finance operations.
  Modifying this rule will make farmer cooperatives more competitive 
and provide better access to capital. This piece of legislation will 
help revitalize farmer cooperatives by providing more accurate tax 
treatment for patronage and non-patronage income.
  I look forward to working with my colleagues to enact the critical 
piece of legislation.
  I ask unanimous consent that the text of the legislation be printed 
in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 785

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES 
                   WITHOUT REDUCING PATRONAGE DIVIDENDS.

       (a) In General.--Subsection (a) of section 1388 of the 
     Internal Revenue Code of 1986 (relating to patronage dividend 
     defined) is amended by adding at the end the following new 
     sentence: ``For purposes of paragraph (3), net earnings shall 
     not be reduced by amounts paid during the year as dividends 
     on capital stock or other proprietary capital interests of 
     the organization to the extent that the articles of 
     incorporation or bylaws of such organization or other 
     contract with patrons provide that such dividends are in 
     addition to amounts otherwise payable to patrons which are 
     derived from business done with or for patrons during the 
     taxable year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions in taxable years beginning after 
     the date of the enactment of this Act.

  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.
                                 ______