Seeking credit union party

Northwestern Financial Review, May 15-May 31, 2002 by Bengtson, Tom

In the past, state lawmakers have shied away from the idea of taxing credit unions because they feared such a tax would encourage state-chartered credit unions to switch to a federal charter. In Indiana and Nebraska, however, that has not happened. Indiana, which assesses an 8.5 percent tax on credit unions' net income, has 59 state-chartered credit unions. Nebraska credit unions, which pay the same franchise tax that statechartered banks pay, has 30 statechartered credit unions. In both states, the tax has been in place for years.

The Minnesota Credit Union Network argued on its web site recently that credit unions pay income tax the same way that a growing class of small banks pays their taxes. Banks that file for subchapter S incorporation don't pay a corporate income tax; instead the bank's earnings flow through to the bank's owners, who pay the tax on their personal returns. The credit union group says the same holds true for credit unions. David Donihue, a certified public accountant with the Milwaukee firm of Virchow, Krause & Co., however, said the statement is "totally false." Owners of subchapter S corporations are required to report their pro-rata share of company earnings annually and pay the appropriate tax. Credit unions do not pay taxes on their retained earnings, unless they are paid out in the rare case of liquidation, Donihue said. Typically, a credit union pays out some of its earnings by offering customers higher rates of interest on their accounts.

Michael Carlson, a bank attorney with the Minneapolis law firm of Faegre & Benson, commented that bankers would be very happy if credit unions, in fact, were required to pay income taxes in the same manner that subchapter S banks pay.

"Credit union advocates often frame debates in the context of a small credit union competing against a huge bank," commented Paul Johnson, chairman and CEO of Iowa State Bank, Algona, Iowa. "In fact, it is really the small bank that has trouble competing against the largest credit unions. That's where banks are seeking a level playing field."