Credit Union and Cooperative Patronage Refunds - Filene ...

ather than later, particularly if the member is a business entity that
would pay income tax on the patronage distributions of income
(cash and noncash) to members. The wisest approach would be to
proactively manage expectations by educating members about what,
exactly, they could expect from the credit union. We would have the
same concerns about this scenario as we expressed for AgGeorgia
earlier in this report. Each of the 27 credit unions in the Callahan
study would have followed the co-op principles to the letter. Each
dollar of patronage earnings would have been allocated to members
just as those principles call for. On the other hand, by allocating
every dollar of patronage earnings, these credit unions would
also have overcommitted their capital, creating more obligations to
redeem allocated equity than we could reasonably expect from any
of the 27 credit unions, while also expecting each to retain capital to
finance its normal growth and expansion.
Allocate and Distribute 40% of Patronage Income
Another strategy these 27 credit unions could adopt under Subchapter
T is to allocate and distribute less than 100% of patronage
earnings to members. For this section, we assume these credit unions
each allocated 40% of their patronage earnings rather 100%. Comparing
the Sub T: 100% with the Sub T: 40%, each $1.00 of income
tax a credit union paid to federal and state governments, it would
reduce its allocated equity redemption obligation by $1.70.
While a strategy of allocating less patronage earnings and paying
more income tax might be useful for Badgerland to conserve its capital,
or helpful for AgGeorgia to begin conserving more of its capital,
it may not be as useful or helpful for any co-op taxed under Subchapter
T whose members are only or primarily consumers, including
credit unions. The taxation of the income of consumers who
are unlikely to deduct the interest they pay to credit unions—other
than interest they pay on mortgages—creates a dynamic that is quite
distinguishable from the taxation of the income of businesses who
deduct the interest they pay as a business expense.
Recall that under Subchapter T patrons pay income tax on the entire
distribution, both the cash and the allocated equity. All income—
both cash and allocated equity—are reported on the 1099-PATR
information return as income. Under either Sub-T scenario in
Figure 6 above, however, for every dollar of patronage earnings
allocated to a consumer, the consumer does not owe any income
tax on April 15. The consumers’ expenditures at the credit union
(other than mortgage interest) are not deductible. Consequently, the
patronage earnings that are allocated are not income for the consumer
even though a 1099-PATR was reported to the IRS. Even so
the consumer receives a minimum of a 20% cash patronage refund,
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