Credit Union and Cooperative Patronage Refunds - Filene ...

Figure 2: Contrast Statutes Governing Co-ops
Federal Land Bank
Sub-T co-op Rural electric co-op
(and federal
credit unions)
State-chartered
credit union
Statute 26 U.S.C. 1382 26 U.S.C. 501(c)(12) 501(c)(1) 26 U.S.C. 501(c)(14)
Exempt or nonexempt Nonexempt Exempt Exempt Exempt
Are patronage earnings
allocated or apportioned
to individual members?
Notification of allocation
to member required?
When does member pay
income tax, if ever?
Is patronage earnings
part of capitalization of
co-op?
How are proceeds
distributed at dissolution
of co-op or credit union?
When are income taxes
paid by the co-op or
credit union?
Yes. Must be allocated
to qualify for tax
deduction allowed for
patronage-sourced
earnings. “Allocation”
is apportionment plus
“notice.”
Yes. Co-op is required
to give specific written
notice of member’s prorata
allocated patronage
earnings.
In the year that member
received qualified written
notice. Members pay tax
on entire distribution even
though no more than 20%
is paid in cash (if business
with co-op was taxable as
income or deductible as
expense).
Yes. Allocated equity is
usually major portion of all
equity capitalization. This
equity is redeemed as and
when co-op has excess
working capital.
On basis of historical
patronage. Articles and/or
bylaws may limit length of
look back.
On all nonpatronagesourced
income and
patronage income that is
not allocated.
Not required. Minimum
requirement is to maintain
records showing each
member’s interest in
co-op’s earnings and equity.
Some notify members of
apportionment of each
member’s pro-rata portion
of patronage earnings.
No. But recommended
practice is to specifically
notify members of pro-rata
portion of apportioned
earnings. Notification is
seen as opportunity to
communicate about co-op
values.
Upon redemption of
allocated equity in cash
paid to the member by
co-op (if purchase was for
tax-deductible business
purpose).
Yes. Apportioned and
allocated equity is usually
major portion of all equity
capitalization. This equity
is redeemed as and when
co-op has excess working
capital.
On basis of historical
patronage. Articles and/or
bylaws may limit length of
look back.
If more than 15% of
income arises from
unrelated nonmember
business.
Not required. If the
earnings are not
apportioned, the earnings
are accounted for in an
unallocated surplus.
No. Practice is mixed.
Some do notify but others
do not notify. Notification
seen as an opportunity
to communicate with
members about co-op
values.
Upon redemption of
allocated equity in cash
paid to the member by
co-op (if loans or services
were for tax-deductible
purpose).
Mixed. Some promote
member ownership of
allocated equity capital,
but others are silent about
that feature of co-op’s
capitalization.
Land Banks—usually
historical patronage, and
governed by articles of
incorporation or bylaws.
(Credit unions—to
members on basis of share
ownership).
Never.
No. Earnings are
unallocated. Most earnings
are accounted for as
“undivided earnings.”
No. But notice of cash
patronage refunds is
seen as an opportunity
to communicate with
members about co-op
values.
Upon receipt of cash
refund paid to member
by credit union (if loans
or services were for taxdeductible
purpose).
No. Equity is all
unallocated. On the other
hand, we know that
members’ businesses
generated earnings that
make up the undivided
equity.
Governed by state law
where incorporated rather
than federal law.
If more than 15% of
income arises from
unrelated nonmember
business.
report, when we discuss tax implications for credit unions. Rural
electric co-ops will be particularly relevant then because their tax
exemption has been criticized even more harshly than that of credit
unions. Moreover, in cases where members are litigating the redemption
of their allocated equity, rural electric cooperatives are of interest
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