Taxation and Supplemental Capital

In its advanced notice of proposed rulemaking (ANPR), the National Credit Union Administration (NCUA) Board expressed concerns that supplemental capital could adversely impact the credit union industry's tax exemption.

The Board speculated that accessing Wall Street for capital could cause Congress to reconsider the credit union industry's federal tax exemption.

According to the ANPR,

"[T]he Board is aware that part of the basis for the credit union tax exemption was that Congress recognized most credit unions could not access the capital markets to raise capital. If all credit unions ... have the ability to access the capital markets to meet capital standards, it could call into question one of the bases for the credit union tax exemption."

The Board also pointed out that state chartered credit unions could be at risk of losing their tax exemption if they issue capital.

Section 501(c)(14)(A) of the Internal Revenue Code exempts state chartered credit unions from federal income taxation because they are without capital stock organized and operated for mutual purposes without profit. But the ANPR noted that the Internal Revenue Service has not defined "capital stock."

The Board wrote that "it is possible federally insured state chartered credit unions in some states will have broad authority to issue supplemental capital instruments that have the characteristics of capital stock, and by doing so could subject themselves to taxation."

So, the credit union industry's tax exemption could be at jeopardy if credit unions can access financial markets to raise capital.