"Farmers need cooperatives to market their commodities and provide them with services and supplies. And, farmer cooperatives need the appropriate tools in order to exist in a way that adds value to their farmer-owners," Grassley said. "A triple layer of tax is unfair to our farmer-owned cooperatives."
Grassley's economic growth package eliminates the dividend allocation rule. The elimination of the rule will decrease some of the regulatory burden of the tax code and increase the opportunity of raising capital for farmer cooperatives.
Grassley said that traditionally farmer cooperatives are under-capitalized and equity poor. "Farmer cooperatives need access to equity financing and greater flexibility in accessing the financial marketplace. The current regulations restrict their ability to do this," Grassley said.
Currently farmer cooperatives are required to treat the income from their member-owners separate from the income of their non-members' money. The farmer-owners must pay income tax on the money used by the cooperative to operate, even if the cooperative retains the money for operation expenses. Because of 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 in taxes.
Grassley has been a long-time advocate for eliminating the triple tax on farmer cooperatives. Legislation was first passed in 106th Congress, but was vetoed by President Clinton. It was then a part of a bill Grassley sponsored called the "Tax Empowerment and Relief for Farmers and Fisherman (TERFF) Act" in the 107th Congress. The legislation was then reintroduced as a stand-alone bill in March.
The economic growth package will now be sent to the full Senate for debate.