The discovery of a scheme being used by banks in several states to avoid paying taxes has led to strong criticism and charges of hypocrisy by credit union representatives.
It has also led to investigations by tax authorities and others in California, Utah and North Carolina who are seeking to determine of the banks owe the states taxes. Under the scheme, first reported by The Wall Street Journal, the banks established "registered investment companies," or RICs. The Wall Street Journal estimated the investment funds, into which the banks channeled more than $17 billion in total, have enabled banks to avoizd paying "hundreds of millions" in state taxes. Among those that used RICs is Zions Bank, the Salt Lake City-based bank that has been an outspoken critic of the credit union tax exemption.
Following the report, CUNA and some of the state leagues wasted little time in making sure it was circulated on Capitol Hill and in state capitols. "If this isn't hypocrisy; if this isn't greed, then I don't know what is," said CUNA President Daniel A. Mica. "We plan to share this information with policymakers in Washington and in every state capital where bankers have been calling for additional taxes on credit unions."
In California, league President Dave Chatfield used similar language, blasting the action as "another example of the banks' hypocrisy," noting the industry has sed the investment funds at the same time they have been lobbying for an end to credit unions' tax exemption, and pushing for expansion of the Subchapter S form of incorporation.
The use of RICs for tax avoidance purposes has fallen out of favor in the past two years, Chatfield noted. "So maybe the problem will correct itself by shining a little sunlight on it." -Michael Bartlett
"However, if inappropriate use of these shelters is found by the current audit, then they will be back-billed for taxes," he said. "Perhaps RICs are illegal, perhaps they just demonstrate questionable ethics - I'm not sure. But, clearly, banks will do anything to avoid paying taxes while criticizing credit unions' tax deduction, which is legitimate because we are non-profit."