Congress Wary Over CUSOs 'Piggybacking' Tax Exemption

Register now

The threat of new regulations-and the compliance headaches that come with them-looms large for CUSOs, which have come under greater congressional scrutiny since the House Ways and Means Committee began examining the tax-exempt status of not-for-profit entities, including credit unions.

Of particular interest to the Ways and Means Committee: the ability of limited liability company CUSOs to provide non-members with services that credit unions are not permitted to offer.

Guy Messick, general counsel for the National Association of Credit Union Service Organizations (NACUSO), noted the House Ways and Means Committee expressed a belief that CUSOs are doing business that CUs cannot do themselves and are therefore piggybacking on the tax-exemption.

"They (staffers) feel that is an unintended abuse," said Messick. "So the agency (NCUA) has a dilemma on its hands. While the NCUA has been very balanced in recognizing the pass-through exemption for operational CUSOs like disaster recovery and certain other services, it may decide that CUSOs may not serve large numbers of non-members, notwithstanding exceptions for 'safe harbor' treatment."

"They asked me to confirm that it was my understanding that federal credit unions do not pay income tax or Unrelated Business Income Tax (UBIT) in Limited Liability Companies (LLC) CUSOs," he continued. "I confirmed that this was my understanding. As to state-chartered credit unions, they told me that NASCUS told them that 20% of state-chartered credit unions pay UBIT. I told them that I was not aware of this statistic. I told them it was my understanding that the credit union trade associations were in talks with the IRS regarding clearer UBIT rules."

NCUA does not examine CUSOs, but does consider whether a CU's investment in a CUSO is an acceptable risk. "The NCUA is likely to request an annual survey of CUSOs to better gauge the business performed by them," said Messick. "That's a near certainty."

The knowledge NCUA has about CUSOs isn't comprehensive, so it's likely that the agency will revise its regulations to include an Annual CUSO Information Certification(s). The ACIC may become a standard part of a CU's 5300 Call Report information.

Because NCUA regulations do not apply to state charter CUs, having only federally chartered credit unions report information would present an incomplete picture of the relationship of CUSOs to CUs and the full impact they have on the industry. NACUSO is conducting a survey of its members to find out what they think are the most important questions to ask in order to get the most valuable information. For example, what entities should be responsible to report information, the CUSO or its investors, and who should have access to it?

Because there are so many levels of CUSO ownership, the reporting requirements may present a problem. While a wholly owned CUSO might easily file an ACIC, some CUSOs have multiple owners, so each credit union partner would need to file separately. Some credit unions own a CUSO, which owns multiple subsidiaries under a holding company structure. It is unclear whether such subsidiaries must file, as the credit unions do not, technically, have a direct line of ownership.

"As always, NACUSO's first concern is for credit unions and we fully support the NCUA in its efforts to maintain the tax exemption for credit unions," Messick said. "While no business desires to pay taxes, the tax issue never drove the value of CUSOs to credit unions. CUSOs managed taxation when they were primarily corporations and they could do it again. We in CUSOs don't want to be a poster child that promotes credit union taxation."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER