Section 337 of the Tax Code Applies to CUs Buying Banks

An article in Business Observer regarding the acquisition of Apollo Bank (Miami, FL) by Suncoast Credit Union (Tampa, FL) noted that the credit union will pay a 24.5 percent tax on the transaction.

According a Michael Bell, who is a lawyer with the law firm of Howard & Howard and has done a majority of bank mergers into credit unions, this tax deals with Section 337 of the Internal Revenue Code.

Michael Bell stated that Section 337 is a tax that "gets paid when when a for profit merges with a non profit." However, he notes this tax does not receive a lot of attention.

Bell pointed out these deals are heavily taxed and have resulted in hundreds of million dollars in taxes being paid.

The tax is on the difference between the fair market value and the tax basis of the bank.

The CEO of Suncoast CU said that the tax is worth gaining access to a new market.

State Economic Development Board Approves $750,000 in Tax Incentives for Dupaco's HQ

The Iowa Economic Development Authority board members voted unanimously on February 22 to award up to $750,000 in tax incentives to Dupaco Community Credit Union (Dubuque, IA).

The tax benefits are associated with Dupaco Community Credit Union's headquarters project.

In January 2019, the Dubuque City Council members approved a development agreement that included 15 years of tax-increment financing rebates totaling $5.2 million. Initial estimates of the tax-increment financing rebates were $2 million.

Read the story.

Dubuque Proposes Tax Increment Financing Rebate for Dupaco Community CU's Development Project

The City of Dubuque, Iowa has proposed tax incentives for the development of a property located at 1000 Jackson Street in the Historic Millwork District by Dupaco Community Credit Union.

Under the proposed agreement, the credit union will make a $38 million capital investment in the 82,800 square foot facility, which will serve as the credit union's headquarters.

The credit union will occupy the top three floors of the building and prepare the rest of the building for commercial tenants.

Dupaco Community Credit Union will retain its current 150 employees in Dubuque and add at least 40 full-time employees employees to its Dubuque operations by October 1, 2023.

As part of the agreement, the city will provide an Urban Renewal Tax Increment Revenue Obligation for 15 years of Tax Increment Financing rebates of property tax increases, which is not expected to exceed $2 million.

The credit union is also requesting state incentives for the project.

A hearing on the project is scheduled for January 22, 2019.

Read the documents.

Orion FCU Receives Property Tax Abatement

Orion Federal Credit Union (Memphis, TN) will receive a 20-year property tax abatement for the renovation of a building into 75,000 square feet of office space.

The credit union is planning a $7 million renovation of the former Wonder Bread building.

Read the story.

Tax Bill Imposes Excise Tax on Excess Executive Compensation

On December 22, President signed the Tax Cuts and Jobs Act (H.R. 1) into law.

While the legislation preserved the credit union industry's income tax exemption, the legislation will impose an excise tax on excess executive compensation at credit unions and other tax-exempt entities.

Specifically, the Tax Cuts and Jobs Act imposes a 21 percent excise tax on executive remuneration that exceeds $1 million annually. The tax would apply to the compensation paid to the five highest-paid executives at a tax exempt organization, if their compensation exceeds $1 million.

Executive remuneration includes employee total compensation (including benefits, except those to a tax-qualified retirement plan, such as Roth IRA plans and 457(b) deferred compensation plans, and amounts not included in gross income). Non-qualified deferred compensation will be treated as income for the first taxable year when there is no substantial risk of forfeiture.

In addition, the excise tax will be applied to any any excess parachute payment paid by the applicable tax-exempt organization to a covered employee.

This provision in the law is meant to provide parity with for-profit businesses, which cannot deduct more than $1 million in compensation in any taxable year for covered employees.

The employer will be responsible for paying the excise tax.

To promote compliance with the law, the Internal Revenue Service should require federal credit unions to file Form 990s just like other tax-exempt organizations including state chartered credit unions.

Republican Framework Will Seek to Modernize Special Tax Treatment of Certain Industries

The Republican framework for tax reform will look to modernize special tax regimes that govern the tax treatment of certain industries and sectors of our economy.

The framework proposes to limit opportunities by certain industries for tax avoidance and to ensure the tax code better reflects economic realities.

While the framework did not specifically mention credit unions, credit unions are an example of an industry that currently receives preferential tax treatment.

The framework was released on September 27.

Read Tax Reform Framework.

Credit Human to Receive $8.8 Million in Incentives to Relocate HQ

The City of San Antonio and Bexar County will provide Credit Human Federal Credit Union $8.8 million in tax and other incentives to move its headquarters to an office tower to be constructed at the Pearl.

Credit Human, formerly known as San Antonio Federal Credit Union, is the third largest credit union in San Antonio (TX).

The city has proposed offering up to $5.2 million in tax abatements and a $1.5 million tax rebate for the project, but the total value of both incentives would be capped at about $5.8 million, according to the Midtown Tax Increment Reinvestment Zone agenda.

The county is proposing a ten-year tax abatement worth a total of just under $3 million.

The project is expected to consist of two multi-story buildings, with the largest building being used for headquarters use for the credit union and mixed office and retail use. The 3.13 acre site on Broadway Avenue will comprise a total of 310,000 square feet of usable space and the construction of a total of 958 surface and underground parking spaces.

According to news reports, the price tag for the project is estimated at $113 million.

Under the incentive deal, the credit union would be required to pay its employees more than $11.83 an hour. After a year, 70 percent of the employees would have to make at least $15.68 an hour.

Read the agenda item.

Read story (subscription required).

Read an earlier story.

Tax Foundation: Tax Expenditures Subsidizing a Specific Industry "Deserves Outright Elimination"

The Tax Foundation released an August report on tax expenditures.

The Congressional Budget and Impoundment Control Act of 1974 defines tax expenditures as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability."

The Tax Foundation wrote that "[l]awmakers interested in reforming this area of the tax code should examine each expenditure individually and first consider what kind of expenditure it is. Does it move us toward a different tax system? Is it spending on an important priority of society at large? Or does it narrowly provide a preference to a specific industry or activity? Answering these questions and classifying the expenditures is critical in determining which are worth keeping."

The Tax Foundation noted that tax expenditures can be divided into three categories. The first category of tax expenditures seeks to modernize our tax code and move it toward some of the tax systems used by our trading partners. The second group of tax expenditures, like the child tax credit, is designed with broader social policy priorities in mind. The final category of tax expenditures subsidizes specific activities and industries, like the credit union exemption from the corporate income taxes.

The Tax Foundation does not believe in the haphazard elimination of tax expenditures to pay for tax reform, as not all tax expenditures are equally worthy of elimination. However, the Tax Foundation believes that tax expenditures that subsidize specific industries "deserve outright elimination."

Read the report.

CUs Should Celebrate Membership Milestone by Paying Taxes

ABA President and CEO Frank Keating responded to a credit union trade group announcement Tuesday that credit union membership has surpassed 100 million.

“If we take CUNA’s questionable assertion at face value, two out of three Americans are subsidizing a $1 trillion credit union industry that doesn’t pay a dime in federal income taxes,” Keating said. “That’s nearly $2 billion a year that could be used to help shrink the federal deficit, but instead goes to what have simply become tax-exempt banks.”

“Credit unions should celebrate their ‘milestone’ by doing their patriotic duty and paying taxes like everyone else,” he added.

NAFCU Overstates the Impact of Taxing CUs

The National Association of Federal Credit Unions (NAFCU) last week released a dubious study claiming that taxing credit unions would hurt the economy by reducing GDP and job growth.

The study states that the annual reduction in GDP would equal $14.8 billion per year and 150,000 jobs would be lost per year, if credit unions were taxed. The study contends that this will occur because reduced competition in the financial services industry will result in higher loan rates and lower savings rates, which will depress personal income and reduce spending.

The NAFCU study also said that the taxation of credit unions would actually increase the federal deficit by almost $1 billion per year as federal tax revenues would fall by more than the revenues collected from taxing credit unions. Oh really.

But why should higher loan rates and lower savings rates be the outcome of taxation?

As a financial cooperative, credit unions claim they operate in their members best interest and have a choice regarding the pricing of their products.

I would contend that some, maybe many, credit unions would not change their pricing policy even after being taxed. They would recognize that it is not in their members best interest to raise loan rates and cut to savings rates and would accept a lower return and a slower pace of growth.

I recognize that there are some credit unions that would try to shift a portion of their tax burden onto their members; but I doubt that the full tax could be passed through to the credit union members. However, these credit unions are putting their profits and growth ahead of their members.

In addition, I believe that even after being taxed there would still be intense competition in the financial services industry. Technology is eroding barriers of entry, making the market place for deposits and loans more competitive.

In conclusion, the study grossly exaggerates the economic impact of the taxation of credit unions.

Radio Ad: Why Should You Pay More Taxes So Credit Unions Can Pay None?

The credit union industry is gathering in Washington, D.C., this week to lobby Congress for preserving its outdated tax exemption. To counter their efforts, ABA is running a drive time radio ad recorded by President and CEO Frank Keating as part of "It's Time to Pay" campaign.

Credit unions are “abusing their taxpayer subsidy, using their untaxed profits to buy huge corporate headquarters and naming rights to stadiums,” Keating says in the ad. “Ask yourself: why should you pay more taxes so that credit unions can pay none?”

Listen to the Radio Ad.

Americans for Tax Reform Confuse CU Tax Exemption with Tax Treatment of Pass-Through Businesses

Americans for Tax Reform last week likened the tax exemption of credit unions to the tax treatment of pass-through businesses, such as partnerships and S-corporations.

Ryan Ellis, who wrote the piece, stated that the only difference is the incidence of the tax.

Unfortunately, Mr. Ellis does not seem to understand the difference in the tax treatment of credit unions versus pass-through businesses.

The owners of partnerships and S-corporations are responsible for paying taxes on the earnings (profits) of the business.

In contrast, credit unions do not pay taxes at the corporate level on their retained earnings (profits), nor do they have an outstanding tax liability that is passed through to their members.

Effective Tax Rate on S Corporations Is 31.6 Percent

A new study from the National Federation of Independent Business found that S corporations will face a 31.6 percent effective tax rate this year.

Read the study.

Does Director Pay and Taxes Impact Rates and Fees?

At one time, NCUA required that any converting credit union include the following information in any disclosure to its members.

EXPENSES AND THEIR EFFECT ON RATES AND SERVICES. Most credit union directors and committee members serve on a volunteer basis. Directors of a mutual savings bank are compensated. Credit unions are exempt from federal tax and most state taxes. Mutual savings banks pay taxes, including federal income tax. If [insert name of credit union] converts to a mutual savings bank, these ADDITIONAL EXPENSES MAY CONTRIBUTE TO LOWER SAVINGS RATES, HIGHER LOAN RATES, OR ADDITIONAL FEES FOR SERVICES.

While it is true that federal credit union directors and committee members serve on a volunteer basis, it is not true for all state-chartered credit unions. Some states, including Pennsylvania, Rhode Island, Indiana, and Texas, currently allow their state-chartered credit unions the option to pay their board members.

In addition, some states tax their state-chartered credit unions. For example, Indiana and Oklahoma tax their state-chartered credit unions. In addition, state-chartered credit unions are subject to the unrelated business income tax.

If it is true that these additional expenses impact interest rates and fees, then there should be differences in the interest rates and fees between federal credit unions and state-chartered credit unions in states that allow for directors to be paid or where state chartered credit unions pay taxes.

NCUA's Chief Economist John Worth should conduct a statistical analysis comparing savings rates, loan rates, and fees between federal credit unions and state-chartered credit unions and publish the results.

Time Magazine: Should CUs Pay Taxes?

In case you missed it, check out a Times Magazine article on Should Credit Unions Have to Pay Income Tax?

The article notes that credit unions were given their tax exempt status because "they were often the sole source of financing for disadvantaged communities whose members had few assets and no way to prove their creditworthiness."

However, the author states "not all credit unions focus intently on bringing banking services to low-income communities" and points out that expanding the credit union business loan cap does nothing to further their public policy purpose.

The author concludes "with so many millions of Americans relying on check-cashing services and payday lenders, shouldn’t Congress be focusing on policies that aid credit unions in helping those folks?"

Tax Foundation Says Taxing CUs Among the Least Harmful Revenue Raising Options

Taxing credit unions is among the least harmful revenue raising options, according to The Tax Foundation.

According to the December 5 Fiscal Fact, "[i]f lawmakers decide that new revenues must be part of any long-term effort to solve the budget crisis, they must choose the least harmful way of raising new revenues or else they risk compounding the crisis by slowing economic growth."

The Tax Foundation wrote:

"As a second-best option to asset sales, require Government Sponsored Enterprises (GSEs) and federally-owned businesses to pay federal income taxes. TVA, for example, has operating revenues of $11 billion and $47 billion in assets. It should pay federal income taxes. The tax benefit to credit unions has been estimated at $2 billion to $3 billion per year."

Elsewhere in the report the Tax Foundation stated:

"#4 Tax certain non-taxed business activities: There are a number of non-taxed businesses or industries that compete directly with private businesses but have the advantage of not paying federal income taxes. These include: credit unions; rural electric coops; nonprofit hospitals; and certain types of insurance firms. These businesses should be taxed as any for-profit enterprise."

The report also notes that if Congress looks to broaden the tax base, it should look to eliminate industry subsidies, targeted tax preferences, and refundable credits first, including the special exemption for credit unions.

Tax Foundation briefing paper.

Kansas Court Rules that CU Due Refund on Sales Tax

The Kansas Court of Appeals overturned a Kansas Court of Tax Appeals' decision and said that Cessna Employees Credit Union should be granted a refund on the state's retail sales tax.

At issue is whether the retail sales tax can be applied to the reimbursement of travel, hotel and meals expenses passed on to the credit union as part of its final invoice from a third party vendor.

Cessna Employees CU contracted with Jack Henry and Associates (JHA) for a computer upgrade. JHA invoiced the credit union for the services, hardware and software and separately invoiced the credit union for the Travel Purchases (JHA employees' transportation, meals, and lodging).

Cessna Employees CU was seeking a refund from the Kansas retail sales tax in the amount of $3,333.05 it paid to JHA on the costs of the Travel Purchases. The credit union claimed that JHA's travel expenses were not taxable as part of JHA's gross receipts.

The Kansas Court of Tax Appeals found that that the reimbursement of the seller's travel expenses was part of the total amount of consideration in the transaction for which the taxable goods and services were sold by JHA and thus subject to the retail sales tax.

However, the state appellate court disagreed. The state appellate court found that the reimbursement for travel expenses does not constitute a retail sale and thus not subject to the retail sales tax.

The court wrote: "the reimbursement and associated tax amounts are not ... subject to retail sales tax in Kansas because they were not sold at retail, they were not a part of the sale of goods and services, and they were not a part of the selling price of the goods and services."

Read the decision.