Credit Union and Cooperative Patronage Refunds - Filene ...

union was unlikely to ever consistently redeem enough allocated
equity to, at a minimum, redeem the equity of deceased members,
the credit union should develop a communication plan that explains
why no redemptions of equity could be made by the credit union.
We expect that a significant part of that communication plan would
be centered around the notion that the credit union provided significant
benefits as a competitor in
the market and that this alone
The wisest approach would be to proactively manage expectations
by educating members about what, exactly, they could union’s inability to redeem
is enough to justify the credit
expect from the credit union.
equity on a regular basis. An
aid to this plan is that most
of the credit unions’ members
would not pay income tax on these patronage distributions, because
in most cases, the loans are for personal or family financing and not
tax deductible to the member. Hence, the patronage income is not
included in the member’s income, either.
If equity redemptions occurred, we expect that the equity of the
credit unions’ oldest members would be redeemed first. We also
expect that the estates of deceased members would request redemption
of equity. These credit unions are not obligated to redeem the
equity. However, the wisdom of an education and communication
plan to explain why the equity is not redeemed can easily be seen.
If the equity is not redeemed, it would be assigned to the deceased
member’s heirs, or the member’s estate could make a tax- deductible
gift of the equity to a charity, perhaps to a 501(c)(3) owned by the
credit union.
Those members who obtain business loans from the credit union
or who obtain real estate mortgages with tax- deductible interest are
likely to pay tax on patronage distributions from the credit union.
These members may be the most highly motivated to push the board
of directors and management of the credit union to redeem their
allocated equity. The argument of these members would be that a
23% cash patronage refund is not large enough to pay the income
taxes that they owe to federal and state governments. At present,
under 501(c)(14), these members do not have that criticism, because
under this exemption, the cash refund is the entirety of the income
taxed by federal and state governments. Under Subchapter T, however,
the credit unions’ business members would pay tax on both the
cash patronage refund and the allocated equity used to distribute
earnings to these members.
These credit unions must be careful to manage members’ expectations
about equity redemptions. If the income is allocated to members,
members often expect that the equity will be redeemed sooner
53