Credit Union and Cooperative Patronage Refunds - Filene ...

We encourage you to have your credit union’s articles of incorporation
and bylaws reviewed by legal counsel for the specific purpose of
learning whether your credit union might be prohibited from paying
a patronage refund. Our concern arises from the fact that at dissolution,
credit union statutes appear to favor share ownership over
historical patronage.
If the owners of shares in the credit union are the beneficiaries of the
remaining proceeds in dissolution, the question arises whether they
could object to any payment that is not paid on the basis of ownership
while the credit union is operating. We recommend that you
discuss with your legal counsel whether your credit union should
amend its articles and bylaws to specifically allow payments of
patronage refunds on a patronage basis any time prior to a dissolution
vote.
Future Tax Considerations
Nothing on the horizon points to any modification of the federal tax
exemptions that apply to federal or state- chartered credit unions. In
this section, we consider two alternatives: (1) that credit unions are
taxed under Subchapter T and (2) an argument for why 501(c)(14)
and 501(c)(1) tax statutes will not be touched.
The Case for Subchapter T
From time to time, the General Accounting Office (GAO) prepares
reports on tax- exempt business entities. In 2005, the GAO prepared
a report on credit unions that, aside from reciting the arguments for
and against the tax exemption, contained no recommendations for or
against the tax exemption.
In 1983, the GAO issued a report recommending that Congress
consider taxing rural electric cooperatives under Subchapter T. The
recommendation was not adopted by Congress, but in this section
we consider what would happen if the GAO made the same recommendation
for taxation of credit unions. Assuming that Congress
acted on the GAO recommendation this time, we apply Subchapter
T to the 27 credit unions in the Callahan study.
Figure 6, a modification of Figure 1, shows these 27 credit unions
under 501(c)(14) and then compares this with two scenarios under
Subchapter T. One scenario shows these credit unions allocating
40% of patronage- sourced income (and paying a cash patronage
refund of 20% of the total allocated) and paying taxes (federal and
state) on the other 60%. The other scenario shows these credit
unions allocating 100% of patronage- sourced income and paying no
income tax.
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