Bankers Quietly Pursuing Option For State Charters To Change Tax Status

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While banks have been actively trying to persuade a number of state legislatures to use a tax on state-chartered credit unions to help fill empty budgets, they are also busy supporting a measure that would allow state-chartered banks to get out from under certain tax liabilities themselves.

The FDIC Board of Directors has issued for comment a proposed rule that would allow state-chartered banks to become limited liability companies (LLCs), which do not pay corporate taxes. Similar to S corporation status that is available to some federally chartered banks, the shareholders are taxed individually on the companies' income, instead.

The idea, supporters say, is to level the playing field between state-chartered and federally chartered banks. While the proposed rule doesn't appear to have any regulatory impact on credit unions, some CU observers have pointed out the irony of banks working to get certain taxes imposed on credit unions while also working to provide tax relief for banks.

"We're not going to object to this rule, but we will point out the irony of the situation," said CUNA's John McKechnie. "They are expending an equal amount of energy trying to get credit unions taxed at the same time they are trying to get tax avoidance for themselves. The banks are always trying to tie our tax status to our powers and authorities, but I have yet to see a bank offer to give up any of its powers to gain any sort of tax reduction. If they get (the ability to become LLCs) I certainly hope they'll see fit to pass along the savings to consumers . . . but I'm not holding my breath."

There was one dissenter among the FDIC directors. Comptroller of the Currency John D. Hawke, Jr. said the FDIC was being used as a "pawn" by the bankers in their fight with the IRS and suggested the FDIC should wait until after the IRS has considered its own regulations pertaining to this issue.

"I believe the FDIC is pretty confused about this, too," McKechnie told The CU Journal. "LLCs and S Corporations are not the same as the credit union tax structure, but they are for-profit entities."

ABA Spokesperson Charlotte Birch said the change "does not reduce taxes at all. It provides additional flexibility to banks that have fewer shareholders. The credit union trades like to draw similarities between themselves and Sub-chapter S corporations, and limited liability companies are similar to Sub-chapter S corporations. But both are still taxed."

McKechnie countered that while CUNA will not be getting involved in opposing or supporting this proposed rule, he can't help but point out the inconsistency of trying to tax credit unions while trying to find ways to avoid taxes for themselves.

"The banks always seem to hyperventilate about our tax status, but you don't see them making any changes to their powers or authorities or changing their for-profit status," McKechnie said.

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