WASHINGTON – Even as they trash the credit union tax exemption on Capitol Hill, more and more banks are opting for their own tax-exempt charter under the designation of a closely held Subchapter S corporation, enabling them to claim a tax exemption roughly equivalent to that for all of the nation’s 7,200 credit unions.
According to the FDIC, there were 2,306 tax-exempt Subchapter S banks at year-end 2011, down slightly from 2010, but up 56% from 1,481 a decade ago. Those banks earned close to $4 billion in tax-exempt net income in 2011, allowing them—at the nominal 35% corporate tax rate—to skirt as much taxes as the entire credit union movement is estimated to be liable for if the credit union tax exemption were repealed.
Subchapter S status, which is reserved for corporations with fewer than 100 shareholders, allows a bank to avoid paying taxes and pass on the tax liability to its shareholders, just like credit unions do.
Among the qualifiers are 65 banks over $1 billion in assets, including $13.3 billion Scotttrade Bank in St. Louis, $9.8 billion MidFirst Bank in Oklahoma, $5.8 billion Beale Bank USA in Las Vegas, $4 billion Intrust Bank in Wichita and $3.8 billion Luther Burbank Bank in Santa Rosa, Calif.
The credit union tax exemption is being touted by the banking lobby as the major reason why credit unions should not be allowed to increase the amount of member business loans they are allowed to make, with the bankers telling Congress the tax exemption gives credit unions and unfair advantage in pricing MBLs.
“I have always found the banking trades to be duplicitous in their efforts to expand the breadth of Sub Chapter S while at the same time attacking the credit union federal tax exemption,” Fred Becker, president of NAFCU, told the Credit Union Journal today.
The credit union lobby is hoping to convince congressional leaders to vote soon on the MBL bill, which would increase the limit of MBLs a single credit union could make from the current 12.25% of assets to 27.5% of assets.
