for this amount only when the nonqualified allocation is redeemed in cash or merchandise. If at that time the cooperative is not able to make use of the deduction, a refund may be obtained of the taxes paid on this amount in the year the allocation was issued.

Senator CURTIS. Part of my time was consumed in yielding to the distinguished Senator from Tennessee, so I will ask one more question. I was in the House of Representatives when we chose to tax the salaries of State officials.

Mr. COHEN. That would have been 1939.

Senator CURTIS. Yes. My recollection is that that bill carried a waiver permitting the States to tax the salary of Federal officials. I have not checked back on the books

Mr. COHEN. That is correct.

Senator CURTIS. I am just reaching back 30-odd years.
Mr. COHEN. I think that is correct, Senator.

TAXING INTEREST ON FEDERAL BONDS

Senator CURTIS. Are you willing to do the same thing in reference to tax on municipal bonds, to give the States authority to tax the interest on Federal bonds?

Mr. COHEN. I think if we were taxing the interest on the State securities that this would be appropriate.

Senator CURTIS. If we did it directly.

Mr. COHEN. If we did it directly, I think it would be appropriate. I might say, Senator, that in the effort to simplify the income tax returns of States, it would be a great deal simpler if they could use the same base as is used for Federal purposes, but today when you try to conform the State law to the Federal law you always have to make an adjustment for the two types of bond interest.

Senator CURTIS. My final question can be answered yes or no, and I will ask why, and the why can be put in when you revise your statement because of time.

ABOLISHMENT OF UNLIMITED CHARITABLE DEDUCTION

Does the Treasury Department favor the abolishment of the unlimited charitable deduction?

Mr. COHEN. Yes, we do.

Senator CURTIS. All right.

In your when you revise I won't take time for a philosophical discussion now, but I would like to know why.

Mr. COHEN. Well, I think I can state it very simply. We did not recommend precisely the provision that is in the bill, but we felt we should do so under the principle that everyone should pay some tax, and while as these funds benefit charity and education, we still thought that the charitable or contribution deduction should not be available to the extent that a person did not contribute something to the support of the Federal Government.

Senator CURTIS. Going down to 50 percent is quite a bit.

Mr. COHEN. We recommended a different rule, which I will elaborate. We wanted to be sure it could not be used to the extent that a person could eliminate tax on 20 percent of his income, and I think roughly the bill reaches the same result in a different way.

Senator CURTIS. Yes.

Mr. COHEN. I will expand that in the record, sir.
Senator CURTIS. Thank you.

(The Treasury Department subsequently supplied the following additional information:)

TREASURY POSITION ON UNLIMITED CHARITABLE CONTRIBUTIONS DEDUCTION Under present law, the charitable contributions deduction for individuals generally is limited to 30 percent of the taxpayer's adjusted gross income. An exception to this general limitation allows a taxpayer an unlimited charitable contribution deduction, if in eight out of the ten preceding taxable years the total of the taxpayer's charitable contributions plus income taxes exceeded 90 percent of his taxable income.

The unlimited charitable contributions deduction has allowed a small number of high-income persons to pay little or no tax on their income. Approximately 100 persons utilize the unlimited charitable deduction and this was the major factor in eliminating taxes for 49 of the 154 individuals with adjusted gross income in excess of $200,000 who paid no tax in 1966. In the great majority of these cases, the bulk of contributions consists of appreciated property, primarily securities. Because no tax is imposed upon this appreciation and because the individual is able to deduct the full value of the contributed property from income, the 100 unlimited givers usually pay little or no tax on their current income, even though such income is actually retained by the taxpayer.1

The Treasury believes that while it is important to encourage charitable giving, it is unacceptable to allow a few individuals the option to choose between supporting the Government and supporting charity. Some contribution to the support of the Federal Government should be required from all persons with substantial income. Thus, we originally recommended to the Ways and Means Committee that the present unlimited charitable deduction be limited so that it could never relieve the taxpayer of paying tax on at least 20 percent of adjusted gross income. At the same time we recommended that the present normal limit on charitable contribution deductions be raised from 30 percent to 50 percent. The House accepted the latter recommendation and voted to terminate the unlimited charitable contribution deduction. The net effect of the changes voted by the House is quite similar to that which we recommended (since under the House rule other personal deductions can be taken in full) and, accordingly, we have now recommended its acceptance. The result in the House bill, taking into account the increase in the general limitation on the deduction to 50 percent, is that charity can remain an equal partner with respect to an individual's income, but charitable contributions no longer will be allowed to reduce an individual's tax base by more than one-half. In view of the fact that it takes a number of years for a taxpayer to qualify for the unlimited deduction, we believe it is appropriate to remove the unlimited deduction gradually over a 5-year period.

The CHAIRMAN. Senator Miller.

Senator MILLER. Thank you, Mr. Chairman.

COOPERATIVES

I would like to touch on the subject of cooperatives briefly. As I understand it, your position is to support the House bill insofar as the payout within 15 years provision is concerned, but you recommend deleting the extra 30 percent and the phase-in over a period of time. Mr. COHEN. That is correct, Senator.

1 For example, in a recent year an individual who qualified for the unlimited charitable deduction had net income of $9.7 million before deduction for charitable contributions. He did not contribute any of the components of this income to charity. Instead, he contributed securities which originally cost him $460.000 and which had greatly appreciated in value to more than $9.7 million. As a result of the deduction generated by this donation, he paid no tax on his $9.7 million of income and no tax on the appreciation that was reflected in the present value of the donated securities.

Senator MILLER. Now, looking at the House rationale of the 15-year payout, on page 168 of the House report, at the middle of the page, it recites the following:

The consent of the patron to be taxed on a qualified patronage allocation or qualified per-unit retain may be made in one of three ways: For members of the cooperative, consent may be given merely by becoming or continuing as a member after the cooperative has provided in its by-laws that membership in the cooperative constitutes such consent. Such a consent cannot be revoked as long as the patron is a member. A second form of consent, which may be used both for members and non-members, is a written consent given by the patron before the end of the year in which the patronage occurs. This consent applies in subsequent years until revoked in writing. A third form of consent, also applicable both to members and non-members, applies in the case of a patronage dividend if no other consent has been obtained. The cooperative gives the patron a qualified check for part of the patronage dividend. The check contains a statement that its endorsement and cashing constitutes consent of the patron to include the full amount of the allocation referred to in the check in income.

Then further down on that page the House Ways and Means Committee gives its rationale by saying:

Qualified patronage allocations and qualified per-unit retains may be considered as amounts distributed by the cooperative to its patrons and re-invested in the cooperative as capital. However, under the methods of consent described above, the patron often does not have an independent choice between investing each patronage allocation or per-unit retain allocation in the cooperative or retaining it for his own use.

I can understand that statement very well because it has been cited, for example, in some cases that if you have a bylaw in a cooperative and a member comes in, a prospective member comes in, and becomes a member, automatically he is bound, and he is bound until he withdraws from the cooperative.

However, I think that there are a great many cooperatives, and especially some of the smaller ones, where we might avoid some hardship which could exist from the 15-year payout requirement and, at the same time, satisfy the control concept which appears to be lacking at least in some instances, as recited by the House Ways and Means Committee, and I was going to ask if an amendment to section 531 (a) of the bill, which would appear at page 310 of the bill, the cooperative section-might be appropriate. Section 531 starts at page 310, 531 (a), and it goes into the 15-year payout, and I am wondering if at the end of that you might satisfy the principle involved here with a proviso which would read substantially as follows:

Provided, that the foregoing

The 15-year payout requirement—

provided that the foregoing shall not apply where a majority of the cooperative's patrons have voted at an annual meeting or by annual written authorization in favor of retention by the cooperative of patronage allocations which otherwise would be required to be distributed to the patrons.

I make this suggestion because I do recognize the principle that the House Ways and Means Committee was trying to satisfy.

I think the suggested proviso would substantially satisfy, especially in the case of your smaller cooperatives, and I can see hardship looming up in the case of many cooperatives under a harsh 15-year payout requirement. I am wondering if this might satisfy the Treasury Department.

Secretary KENNEDY. I think, Senator, that is worth looking into very carefully, and we will come back to you, but it sounds to me like it has some merit. I will ask for Mr. Cohen's thought on this matter. Mr. COHEN. I think, generally, Senator, we are inclined to agree that that would be acceptable as long as it is understood this would be an annual vote or an annual authorization. But we would like to consider it further. Our present inclination is to think that that would be acceptable.

Senator MILLER. Then you will let us know later, and if you have any suggested language other than this, we are certainly open for it. Mr. COHEN. Yes.

Senator MILLER. I am trying to satisfy a principle which is involved here and, at the same time, avoid what could be undue hardship. Mr. COHEN. Yes.

FARM LOSSES

Senator MILLER. I notice that the Treasury Department in the case of farm losses generally goes along with the House approach, except that the House bill provides that nonfarm adjusted gross income in excess of $50,000, and farm losses in excess of $25,000 in the area under attack, and your approach is to put the area subject to attack of $25,000 nonfarm income, and $15,000 farm losses; is that correct?

Mr. COHEN. That is correct, Senator. We made this recommendation to the House Ways and Means Committee in April, but without any requirement of outside income, and made it applicable in the case of losses exceeding $5,000.

The committee put the outside income limitation in and raised the loss level to $25,000, and we are suggesting $15,000 as the loss limit, and $25,000 as the outside income limit.

Senator MILLER. Why do you change your mind from the House side of the Capitol to the Senate side of the Capitol?

Mr. COHEN. Well, we tried to reach agreement in the Ways and Means Committee in a number of respects.

I think that we were concerned from the standpoint of not being unduly burdensome on farmers generally, and we think that from a revenue standpoint we can go up to $15,000 without serious effect. The change would exempt from the operation of the rule a great many persons with small farm losses.

In addition, I might say, that in the hurry with which we were operating in April-I might say I took office on March 11 and we presented these proposals on April 22-we had not had time to run the computer on them. We later did run a computer so that we now know a good deal about the difference between a $5,000 or $10,000 or $15,000 or $25,000 limit, and on the basis of the computer run we are now satisfied that $15,000 would prevent the larger amount of the abuse. We did not have that detailed information on April 22.

Senator MILLER. What is the rationale of $25,000 nonfarm income? Why not make it $15,000 on nonfarm income or why not make it unlimited nonfarm income where it represents wages and salaries earned by the farmer and his wife who have to work off the farm probably to make ends meet in many cases?

Mr. COHEN. Well, I think, perhaps, the thought, Senator, would be that only if a person has more than $25,000 of outside income is he

likely to be operating the farm for the tax advantages that would be involved.

If a person has less income than that from outside sources his rate of tax is sufficiently low that he cannot be using the tax benefits to finance the venture.

On the other hand, when one goes above some limit his tax rate becomes so high that, in essence, he finances his losses out of his tax saving. The limit is a matter of judgment, and no one can say 25,000 as against 30 or 20, but we made an effort to put the limit at a range where the tax rates would begin to get high enough that you could conclude that the farm loss is affected by his tax considerations.

Senator MILLER. Well, there is a principle involved, isn't there? Mr. COHEN. Yes.

Senator MILLER. Regardless of the amount that you set, but I take it that what you are looking at is looking at the area which makes it really worthwhile from an administrative standpoint

Mr. COHEN. Yes.

Senator MILLER (continuing). To draw the line.

Mr. COHEN. Yes.

In this instance we are talking about the difference between ordinary income rates and capital gains rates, and they tend to become more important as you go up the tax brackets, and we were also trying to

Senator MILLER. I would like to make a comment on that point. I realize that is a factor, but I suggest to you there are other situations where capital gains are not particularly involved, and this represents an unfair competition between the farmer, on the one hand, who has to rely 100 percent on his income from his farming operation, and another farmer down the road who does not have to worry too much about that because he has outside income that he can writeoff the farm losses against. He does not have to fight for higher prices or for lower cost production like the first farmer does, and this constitutes a very irritating means of unfair competition which, I must tell you, many farmers, regular farmers, commercial farmers, and especially smaller ones deeply resent.

Mr. COHEN. Well, this provision is applicable only in respect to the difference between ordinary income and capital gains. This deals with the possibility of having deductions against ordinary income followed by capital gains on the sale of livestock or orange groves. Beyond that we would include the farm losses as a preference in our limit on tax preferences and our allocation of deductions provisions. Senator MILLER. To what extent would you include those? Mr. COHEN. Pardon me, sir?

Senator MILLER. What extent would the farm losses be included in the LTP, the full extent?

Mr. COHEN. Full extent.

Senator MILLER. No $15,000 minimum on that?

Mr. COHEN. No, sir; that is right. And, moreover, there is a provision in the bill to strengthen the hobby loss provision materially and that would have an effect on this question of competition between the commercial farmer and someone who would be in it for the tax advantages.