Forensic Accounting Expert Discusses Alleged Violation of Capper-Volstead Act

This case involves an agricultural cooperative that was operating under the Capper-Volstead Act which permits producers to market their products jointly. This particular co-op generated a large amount of money, a significant percentage of which was considered non-patronage income. The co-op claimed that their bylaws did not mandate fixed patronage dividends, but it was alleged that in not doing so, they were in violation of the Capper Volstead Act. It was also alleged that the co-op executives receive bonuses based on the volume of product sold which puts them in direct conflict with the members that rely on the price of the product.

Question(s) For Expert Witness

1. Please describe your familiarity with the Capper-Volstead Act?

2. What standards exist regarding patronage dividends, if any?

Expert Witness Response E-136560

I have worked with many cooperatives in my career including agricultural, energy, residential and production. In regards to agricultural cooperatives, I have experience in measuring damages incurred by groups of farmers growing melons in southeastern states of the US. The engagements centered around watermelon growers and cantaloupe growers and involved an analysis of revenues, costs, and profits relating to the disbursements of profits to members and non-members per their bylaws. It was asserted that certain members had been inflating costs and improperly allocating balances to other members. On another occasion, I was asked to measure losses incurred by growers who formed a cooperative. The cooperative purchased agricultural plastic for use in early growing seasons, which was later found to be defective. My team had to work with the individual members to determine the specific losses incurred at each farm. Agricultural cooperatives must abide by several bylaws to be protected by the Clapper-Volstead Act. The cooperative should be operated for the benefit of its members. All members must engage in the production of products; not merely the processing of products subsequently. Membership is revoked if a member becomes a non-producer. The act looks to limit the amount of non-produced goods when compared to produced goods. This is done in an attempt to limit outside factors from influencing cooperative member's decision making. As well, agriculture cooperatives operate under a one member one vote concept. This is done to prevent control issues with the membership group. The standards in place with respect to patronage dividends would primarily consist of the IRS US Federal Tax Code, Subchapter T. This provision details a multi-step approach to addressing dividends distributed (either in cash or written notice of allocations) to its members.