Credit Union and Cooperative Patronage Refunds - Filene ...

In this chapter, we will review four tax regimes that are applied to
cooperatives. The first is Subchapter T, which applies to the widest
variety of cooperatives. The second is 26 U.S.C. 501(c)(12),
which applies to rural electric cooperatives. The third is 26 U.S.C.
501(c)(1) as applied to Federal Land Bank Associations under
12 U.S.C. 2098. 14 The fourth is 26 U.S.C. 501(c)(14), which applies
to state- chartered credit unions.
The key points of distinction among these tax regimes include
(1) whether the co-op is treated as tax exempt or nonexempt,
(2) whether earnings (and which ones—patronage earnings only or
nonpatronage earnings too) are apportioned to individual patrons,
(3) when the co-op pays cash to members, (4) when members pay
income tax on income allocated to them from their co-op, and
(5) whether the co-op is required to give notice of patronage allocations
to members.
The tax exemption under which state-chartered credit unions operate does not require credit
unions to allocate or apportion their earnings to individual members. Credit unions’ equity is
undivided. Members have no idea how much of their own transactional activity with the credit
union contributes to the credit unions’ equity.
On a continuum moving from left to right in Figure 2, Sub-T
co-ops are most regulated, and state- chartered credit unions are least
regulated by their tax statutes, in how closely they must follow co-op
principles. The tax exemption under which state- chartered credit
unions operate does not require credit unions to allocate or apportion
their earnings to individual members. Credit unions’ equity is
undivided. Members have no idea how much of their transactional
activity with the credit union contributes to the credit unions’ equity.
Credit union members do not expect any equity to be redeemed,
ever.
The relevance of including a discussion of rural electric cooperatives
under 501(c)(12) may not become apparent until much later in the
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