Credit Union and Cooperative Patronage Refunds - Filene ...

members standing on the basis of ownership rather than to present
and former members on the basis of historical patronage.
The co-op agency theory holds that the co-op is an agent of its
members and, therefore, that the co-op’s earnings really belong—
have always belonged—to members and have never belonged to the
co-op. This theory dovetails with the principle of service at cost,
which holds that patronage earnings are rebates, discounts, or price
enhancements when they are allocated and distributed as patronage
refunds in cash or allocated equity to members on a patronage basis. 7
The co-op agency theory and service-at- cost principles support the
favorable income tax treatment of co-ops. If the earnings were never
the co-op’s in the first place, there is no justification for taxing the
earnings at the co-op level. If the earnings are taxed, they should be
taxed at the member level.
Service at cost requires that earnings be distributed on a patronage
basis as patronage refunds to qualify as rebates, discounts, or price
enhancements that reduce “costs” to the members. If the earnings
are distributed on the basis of share ownership, that distribution is
a return on equity rather than a zeroing out of the co-op’s earnings
to the logical conclusion that the costs of products or services are
reduced to breakeven. The service-at- cost principle is not followed if
the co-op’s earnings are distributed on the basis of share ownership.
And what applies to the co-op’s earnings while it is a going concern
also applies to its equity at its dissolution. So in a dissolution, when
credit unions distribute the remaining proceeds on the basis of share
ownership to the last members standing rather than on the basis of
historical patronage to present and former members, they are deviating
from the co-op agency theory and service-at- cost principles.
Distribution of the remaining proceeds at dissolution should be on
the basis of historical patronage going back to the beginning of the
co-op to adhere to these principles consistently. If all the earnings
and remaining proceeds are distributed on the basis of historical
patronage, we can logically conclude that the co-op always operated
at cost from its beginning to its end.
The co-op principle of subordination of capital is also not followed
when credit unions distribute the remaining proceeds on the basis of
share ownership to the last members standing. This principle limits
the financial return paid on equity to investors to a “reasonable”
return for its use. The last members standing at a credit union’s dissolution
benefit disproportionately to all the former members. Not
only is their proportionate equity capital returned as it would be if
the agency and service-at- cost theories were followed using historical
patronage, but the last members standing receive an extraordinarily
large return on that capital when the balance of the dissolution
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