August 21, 1961
PAGE 16546
AMENDMENT OF FARM LOAN ACT AND FARM CREDIT ACT.
Mr. MANSFIELD. Mr. President, I ask unanimous consent that the unfinished business be temporarily laid aside and that the Senate proceed to the consideration of Calendar No. 723.
The ACTING PRESIDENT pro tempore. The bill will be stated by title for the information of the Senate.
The LEGISLATIVE CLERK. A bill (S. 1927) to amend further the Federal Farm Loan Act and the Farm Credit Act of 1933, as amended, and for other purposes.
The ACTING PRESIDENT pro tempore. Is there objection to the request of the Senator from Montana?
There being no objection, the Senate proceeded to consider the bill (S. 1927) to amend further the Federal Loan Act and the Farm Credit Act of 1933, as amended, and for other purposes, which had been reported from the Committee on Agriculture and Forestry, with amendments
[TEXT OF AMENDMENTS OMITTED]
Mr. MUSKIE. Mr. President, this bill was passed over on the call of the calendar because of a question raised with the calendar committee bearing upon a statement made in the report. The Senator from Florida [Mr. HOLLAND] is present and is willing to make the information in this regard part of the RECORD. I should like to direct a question to him, if I may.
Mr. HOLLAND. Mr. President, I shall be happy to respond, if I can, to any question the Senator from Maine may have.
Mr. MUSKIE. Mr. President, at the bottom of page 10 and the top of page 11, there appears a statement in the report from the Treasury Department, as follows:
In summary, it appears that appropriate bad debt reserves for production credit associations can best be resolved on an administrative basis; that the proposed statutory 5 percent reserve ceiling cannot be justified from the viewpoint of a logical and equitable application of the income tax law even when taking into account the large loss experience of lending institutions during the economic collapse of the 1930's; and that enactment of a 5 percent reserve ceiling for production credit associations, if used as a precedent for comparable lending institutions, would entail revenue losses substantially in excess of $1 billion.
The question which arose in the calendar committee was as to that tax impact suggested by the section of the report. I should appreciate having the Senator's comments.
Mr. HOLLAND. I am very happy to respond to that question, Mr. President.
In the first place, the bill would amend various sections relative to the Farm Credit Administration units, in furtherance of the purpose which we entered into in 1953, to have all those units pass under the control of the growers who were using them. The one section which seems to have brought any difficulty is the one referred to by the distinguished Senator from Maine. That section would permit the production credit associations to set up a bad debt reserve of 3½ percent of their outstanding loans on a basis of transferring to that reserve one-half percent each year until the reserve is completed.
The subject matter is one that has brought on a great deal of trouble and litigation. There have been 23 suits in the Federal district courts relative to the reserves set up by production credit associations, which now, in most cases, belong entirely to the growers who are using them. Of the 488 associations, I believe now there are only 13 in which there is any Federal capital still invested. These suits are referred to on page 10 of the committee report. If the distinguished Senator will look at that page, I think he will see a rather brief statement appearing in the third paragraph on that page, which I shall read into the RECORD:
In such actions brought by 23 of the associations, the courts allowed the claims of 17 associations in full; in 3 cases a substantial part of their claims were allowed; and only in 3 cases were the additions claimed disallowed in total. These decided cases are summarized at pages 77-79 of the hearings on S. 1927 under the heading "Percentages of Outstanding Loans Accepted by Courts as Appropriate for Bad Debt Reserves of Production Credit Associations in Passing on Additions Thereto To Be Allowed as Deductions for Federal income Tax Purposes." In one case, the court allowed the association accumulated bad debt reserves of only 3 percent of outstanding loans even though more was claimed. For other associations, accumulations as high as 4.09, 3.76, 4.15, 3.88, 4.33, 4.65, 4.76, and 4.49 percent of outstanding loans were allowed by the courts as bad debt reserves. Smaller accumulations were involved for most of the associations because they had not yet built up their reserves any further for the years in dispute. Inasmuch as such court decisions now have delineated what are deemed reasonable bad debt reserves for the production credit associations, it is considered that the associations should not have to continue to resort to court actions to sustain deductions made for bad debt reserves. Such a procedure is costly and time consuming not only to the associations but also to the United States which is represented by the Department of Justice in such actions. The reasons for specifying in the law the amounts which the production credit associations are to add to their bad debt reserves each year were gone into at length in the hearings on S. 1927.
As the bill was originally drafted by the Farm Credit Administration and introduced by the distinguished Senator from Louisiana [Mr. ELLENDER], the chairman of our committee, it would have provided for an authorization of reserves to the extent of 5 percent of the outstanding loans. The committee, on seeing the record of these 23 suits, noting that so many of them were in the area between 3½ percent and 5 percent, decided that, as a matter of caution, we should approve the establishment of a reserve of 3½ percent, with the provision in the bill that if higher reserves were needed, under the method of doing business of any particular production credit association, such higher reserve could be agreed upon between the association and the Commissioner of Internal Revenue.
Earlier than our drafting of the amendment, which is now in the bill, and which we think is entirely reasonable, the question had been submitted to the Department of the Treasury. The submission brought forth the letter from which the distinguished Senator from Maine has quoted, in part. If the Senator will look at the report, he will see the entire letter of the Treasury Department set forth on page 17 and following to the middle of page 20. It is a letter addressed to the Senator from Louisiana [Mr. ELLENDER] from Stanley S. Surrey, Assistant Secretary. However, the Senator will note that on page 19, the place at which this "$1 billion dream" came into the picture, there appears the following:
At the present time, the average reserve ceiling of commercial banks employing the bad debt reserve formula amounts to 2.4 percent of eligible loans. It is estimated that, if a 5-percent reserve ceiling were applied to commercial banks, the consequent loss to Federal revenues would amount to well over $1 billion over a short period of time, plus a substantial continuing revenue loss as the banks increased their outstanding loans.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. HOLLAND. I yield.
Mr. MUSKIE. The first point that ought to be made is that the bill provides for 3½ percent rather than 5 percent.
Mr. HOLLAND. The Senator is correct. Furthermore, to bring about any such great loss as Mr. Surrey indicates in his letter would require not only a 5 percent reserve, but also would require that the reserve be made applicable to commercial banks, which he mistakenly refers to in the paragraph which the Senator has read into the RECORD as “similar institutions.” They are not similar institutions, because the commercial banks lend from deposited funds, funds which are deposited by their customers, whereas the production credit associations lend entirely from borrowed funds, on which they can have only a small markup in the interest rate under the law.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. HOLLAND. I yield.
Mr. MUSKIE. What, if any, would be the impact of this specific provision with respect to the lending institutions covered by it upon tax revenues?
Mr. HOLLAND. It would be completely negligible, because the courts have repeatedly upheld reserves greater than 3½ percent. What we are trying to do is to establish a figure which would give repose to these organizations -- 488 of them -- which exist for only one purpose. I was about to add that whereas commercial banks can lend for many purposes, these institutions, which lend
only borrowed money, can lend for only one purpose, and that is the production of agricultural crops on a short-term basis, so the production credit associations are in no sense comparable to commercial banks. The committee, with what I thought was an excess of caution, reduced the 5-percent reserve figure to 3½ percent. Of course, it applies only to the production credit associations. As the Senator has already noted, in many instances the courts have upheld reserves over 3½ percent in actually litigated cases.
Mr. MUSKIE. Mr. President, I express my appreciation to the distinguished Senator from Florida. He has answered to my satisfaction the questions which were raised by the calendar committee.
Mr. HOLLAND. I thank the distinguished Senator.
Mr. President, I ask unanimous consent to have printed in the RECORD at this point a general explanation of the bill, which I shall not weary the Senate by reading, but merely place it in the RECORD as an explanation of the bill.
There being no objection, the statement was ordered to be printed in the RECORD, as follows:
STATEMENT BY SENATOR HOLLAND
This bill makes several technical changes in the laws relating to the cooperative credit system regulated by the Farm Credit Administration.
Two of these changes relate to the Federal land banks. The Federal land banks are the long-term real estate lending agencies of the farm credit system. They are entirely borrower owned. The first of the amendments relating to the Federal land banks permits installment payments on loans made by the banks to be scheduled more frequently than semiannually. The law now provides that each mortgage shall contain an agreement providing for the repayment of the loan on an amortization plan by means of a fixed number of annual or semiannual installments. Where the borrower's income is received on a monthly basis or some other basis more frequently than semiannually, as is the case for instance with milk producers, a monthly or other repayment schedule may be preferable to an annual or semiannual schedule. The bill would permit the most suitable arrangement to be made.
The second amendment relating to the Federal land banks would make it easier for a farm which had incorporated to obtain a loan. Many family farms are incorporated today for a variety of purposes. For instance. incorporation makes it easier to divide up the various interests among the children when the parents die. At present Federal land banks may make loans to corporations only where the owners of 75 percent of the stock are actually farming on the land and owners of a like amount of stock assume personal liability for the loan. Thus if the stock should descend to two sons in equal parts and only one of them remains on the farm the Federal land bank could not make a loan to the corporation. The bill would amend this to permit a loan to a farming corporation if the owners of stock in the corporation assume personal liability for the loan to the extent required under the rules and regulations prescribed by the Farm Credit Administration.
Three of the changes made by the bill relate to the intermediate credit agencies; namely, the Federal intermediate credit banks and the production credit associations.
At present the maximum maturity for loans or discount by the Federal intermediate credit banks is 5 years. The bill would make this 7 years. Experience has shown that while maturities of 2 to 5 years are satisfactory in most cases of loans made for such purposes as purchases of livestock and heavy equipment, improvement of farm buildings, and installation of bulk milk tanks, the banks at times encounter individual cases in which a 6- or 7-year maturity is needed to liquidate the obligation.
The second amendment relating to the intermediate credit agencies would combine the revolving funds available for subscription by the Government to the stock of the production credit associations and the Federal intermediate credit banks. At present there is a revolving fund of $60 million available for subscription to the capital stock of production credit associations, and a revolving fund of $70 million authorized for subscription to the capital stock of the Federal intermediate credit banks. Of the latter $70 million authorized revolving fund, only $40 million has actually been made available and the increase to $70 million is to be made with proceeds from the retirement of the last $30 million of Government-owned stocks in the credit banks at January 1, 1957. Only a small portion of the $60 million revolving fund is needed for the production credit associations. However, the Federal intermediate credit banks may have greater needs than can be supplied by the revolving fund now available to them. The law prescribes that the debentures and similar obligations issued for a Federal intermediate credit bank and other borrowings may not exceed 10 times the surplus and paid-in capital of the bank. As the bank expand their business in order to meet farmers' needs for intermediate credit, it is therefore necessary that they issue additional stock. As of March 1, 1961, investments in the capital stock of the credit banks out of the revolving fund totaled $19,350,000, and it is estimated that an additional $5,500,000 will be needed through the rest of this year, leaving $15,150,000 of the original $40 million available after this year. The production credit associations obtain their funds by discounting notes with the Federal intermediate credit banks. The most effective way, therefore, of providing the production credit associations with needed funds is to permit use of both revolving funds for the purchase of stock in the Federal intermediate credit banks, thereby expanding the base for borrowing by the Federal intermediate credit banks and increasing their ability to discount the notes of the production credit associations.
The third change made by the bill with respect to intermediate credit agencies relates to the production credit associations. With the committee amendment, it requires them to set aside from each year's earnings an amount equal to one-half percent of their outstanding loans for a bad debt reserve until such reserve equals 3½ percent of outstanding loans, after which increases in the reserve are permitted, but not required. At present the law permits the establishment of a bad debt reserve without limitation and without requirement as to the setting up of any specific amount. The production credit associations were not subject to Federal income taxes so long as the United States held any class A stock in them. At present the Government holds class A stock in only 13 associations out of a total of 488, so that the remaining 475 associations are now subject to Federal income tax. The first of the associations to file Federal income tax returns began doing so in 1945. Since that time the Internal Revenue Service has questioned the reasonableness of the bad debt reserves of the associations in a great number of cases. Twenty-three associations have brought suit against the Government to recover the amount of taxes paid as a result of the disallowance of bad debt reserve deductions by the Internal Revenue Service. In 17 of these 23 cases the courts allowed the associations' claims in full. In three cases the courts allowed a substantial part of the associations' claims, and in only three cases were the claims disallowed in total. The courts have allowed bad debt reserves as high as 4.76 percent of outstanding loans. The bill, by requiring the production credit associations to accumulate a bad debt reserve of 3½ percent of outstanding loans, would be legislatively determining a reasonable bad debt reserve for production credit associations which ought to be determinative of the question of reasonableness for the purpose of the Federal income tax laws as well. In view of the fact that a number of courts have allowed bad debt reserves in excess of 3½ percent, the reasonableness of a reserve of this amount should hardly be subject to question.
The bill as introduced prescribed a maximum bad debt reserve of 5 percent. In view of the objections of the Internal Revenue Service, whose letter is set out in the committee report, the committee has recommended a required bad debt reserve of 3 ½ percent and a permissive bad debt reserve above that without limit. In the case of bad debt reserves above 3% percent then, the law would be left as it now is and the reasonableness of the excess would be for administrative determination.
The last change by the bill relates to the banks for cooperatives and would permit the retirement of the interests in any bank for cooperatives held by a cooperative which is liquidated or dissolved.. Cooperative associations borrowing from banks for cooperatives are required to purchase class C stock in the bank. Such stock may also be issued to the cooperative as a patronage dividend. The cooperative is also allocated an interest in the surplus and contingency reserves of the bank which eventually is payable in claw C stock. Class C stock may not be retired until after all class A stock owned by the Government is retired and all class B stock owned by investors issued in the same or earlier fiscal years is retired. It will be some years before such interests are retired and the proceeds can be paid to the holders. When that time comes any interests of former borrowers who have liquidated or dissolved will present a very difficult problem unless the banks are permitted to retire and cancel their interests upon dissolution.
As introduced the bill also contained another provision which would have permitted the banks for cooperatives to make loans to cooperatives, even though only 75 percent of their voting rights were held by farmers. At present the requirement is 90 percent. For the reasons stated in the report the committee thought this provision might not be wise and has recommended its deletion from the bill.
The ACTING PRESIDENT pro tempore. The question is on agreeing to the committee amendments.
The amendments were agreed to.
Mr. MCCLELLAN. Mr. President, a Parliamentary inquiry.
'Me ACTING PRESIDENT pro tempore. The Senator will state it.
Mr. MCCLELLAN. What bill is before the Senate?
The ACTING PRESIDENT pro tempore. S. 1927.
The bill is open to further amendment. If there be no further amendment to be proposed, the question is on the engrossment and third reading of the bill.
The bill was ordered to be engrossed for a third reading, was read the third time, and passed.