Credit Union and Cooperative Patronage Refunds - Filene ...

and the consumer is money ahead over an IOF even if none of the
balance of up to 80% of the allocation is ever redeemed to the consumer
member.
The business member of a co-op that is taxed under Subchapter T
pays income tax on the entire distribution of cash plus allocated
equity. Assume that each business member pays tax at a marginal
rate of 35%. For every dollar of income that is reported to on
1099-PATR to the IRS, the business pays income tax of 35 cents.
If the co-op pays only a 20% cash refund, the business member is
in a deficit position of 15 cents for each dollar of patronage income
that is allocated to the member. Hence, business members are most
likely to complain to the board of directors and management that the
co-op is not paying enough cash and/or redeeming equity quickly
enough to justify a co-op membership.
Allocating less than all of the patronage income and paying income
tax on the balance is not the only strategy that a co-op might adopt
to help the co-op manage the amount of capital that is available to it.
A Subchapter T co-op may also consider paying business members a
higher cash patronage refund than consumer members to differentiate
between consumers and businesses. In addition, a Subchapter T
co-op could also distinguish between consumers and businesses by
redeeming the allocated equity of businesses more quickly than it
redeems the allocated equity of consumers.
At the end of the day, any Subchapter T co-op’s board of directors
and management must evaluate and determine how much capital
its co-op can devote to redemptions of allocated equity. That determination
will depend on the co-op’s need for capital. Its growth. Its
potential. Its risk of sustaining losses. Its ability to attract outside
capital. Its ability to generate earnings.
The important thing for a Subchapter T co-op is to arrive at a
redemption program that makes sense to the co-op and its members.
A redemption program should be consistent with the varying
tax positions of its members. The program should be sustainable
but also challenge the co-op and its members. The program should
reward patronage more than it rewards ownership. And finally, the
program should be capable of being communicated to members in a
way that makes sense to members.
Examining the Tax Exemption
In 1983, the GAO suggested that Congress consider an evolution
of rural electric cooperatives from 501(c)(12) to Subchapter T, but
Congress did not act on the GAO’s suggestion.
In its 1983 report, the GAO contended that the tax exemption was
difficult to administer and that industrial and commercial members
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