Penn. Supreme Court To Hear Arguments On CU Tax Exemption

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The Keystone State became the main battleground in the banker wars over the credit union taxation last week when the Pennsylvania Supreme Court agreed to review the bankers' challenge to the state's tax exemption for credit unions.

The suit is just one of several on both the state and federal levels brought by the Pennsylvania bankers, all of which target broad charters granted to credit unions.

But in an unusual legal maneuver, the Pennsylvania Bankers Association and an allied bank appealed the lower court's dismissal of one of four legal arguments challenging the tax exemption, while the three other arguments are still pending. Ray Pepi, an attorney for Kirkpatrick & Lockhart, who is representing the bankers, said an arcane state law requires that a party launch an appeal in a limited period of time, even if judgment has not been rendered on the entire case.

The case could have severe ramifications for credit unions, as the Pennsylvania Department of Revenue, one of the defendants in the suit, estimates that the tax exemption saves credit unions as much as $20 million a year in corporate and other state levies. The other defendants are the Pennsylvania Department of Banking, TruMark Financial CU and Freedom CU. The tax challenge grew out of an appeal of broad, five-county charters the banking department granted the two Philadelphia credit unions which encompass more than five million people surrounding Philadelphia

It could also open the door to challenges brought in other states and on the federal level by the bankers, who have been working to pry open the tax door for decades.

Bankers Laud Decision

The American Bankers Association, which has been leading the tax fight nationally, lauded last week's decision by the Pennsylvania panel to review the credit union exemption.

"We certainly are glad to see that the Pennsylvania Supreme Court is now positioned to potentially rule on the constitutionality of the tax-exempt status of credit unions under Pennsylvania law. Though this case appears to be specific to Pennsylvania, we are very supportive of the efforts by the Pennsylvania credit union task force to level the playing field between banks and credit unions," said Charlotte Birch, spokesperson for the bankers group.

The state high court will hear the bankers' argument that the tax exemption violates the state's constitution that delineates exactly which entities the legislature may exempt from taxation. The bankers claim that credit unions are not among those entities delineated as tax-exempt, and therefore, the tax exemption granted credit unions by the legislature is unconstitutional.

The lower court, Pennsylvania's Commonwealth Court, has yet to rule on the bankers' other tax arguments: the tax exemption for credit unions violates state and federal statutes on uniform treatment of similar entities; large, diversified credit unions have outgrown the original intent of the tax exemption; and the tax exemption is discriminatory because it benefits only certain residents, members of credit unions.

The main argument of the Pennsylvania bankers, as for bankers throughout the country, is that large, diversified credit unions, like TruMark Financial CU and Freedom CU, with $900 million and $275 million in assets, respectively, have grown into full-service financial institutions and are now little more than tax-exempt banks, according to Pepi.

The Pennsylvania credit unions deny this, noting that there is still a vast array of differences that distinguish credit unions from for-profit financial institutions. They include lesser powers for credit unions on investments and allowable services, volunteer boards of directors and one-member, one-vote democracy.

Penn. CUs Remain Optimistic

The Pennsylvania Bankers Association, which brought the suit, along with Erie-based Northwest Savings Bank, sees the high court review as an opening in the tax fight. "We are encouraged that the court here in Pennsylvania will hear this question of taxation. It is one that we think should be given greater consideration," said James Biery, president of the state bankers group.

The credit union side, however, was optimistic of their chances last week. Michael Wishnow, chief spokesperson for the Pennsylvania CU Association, noted the issue already has been dismissed by the lower court, and he predicted the high court will also reject the bankers' case.

"We are reasonably confident at the end of the day it will rule in our favor," said Wishnow.

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