WASHINGTON-Though CUNA did not provide oral testimony at a recent hearing on expanding Subchapter S corporations, CUNA submitted written testimony to the House Ways and Means Selective Revenue Measures Subcommittee pointing out the banks' lobbying efforts to reduce their own taxes, while aggressively pursuing measures to tax credit unions. "CUNA has no objection to financial institutions reducing their tax burden and believes any savings should be passed along to customers. However, we feel compelled to point out the duplicity of the banking industry position," CUNA's testimony read. CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn explained, "All we're saying is they shouldn't be talking out of both sides of their mouths and trying to help themselves while trying to hurt others, particularly credit unions.I think part of what we've said over recent weeks is that we're tired of turning our cheek all the time and that it's about time that we point out some of the hypocrisy of the banking industry." CUNA's written testimony argued, "If recent growth rates continue, the total foregone tax revenue due to Subchapter S election by banks will amount to approximately $13.5 billion over the next 10 years. By 2006, the annual foregone tax revenue from Sub S banks will exceed the foregone revenue from the credit union tax treatment." According to CUNA, the cost to the Treasury of eliminating double taxation under Sub S was a record $593 million in foregone taxes in 2001 and $2.1 billion over the past five years. The move is part of a more proactive lobbying strategy that CUNA has demonstrated in recent weeks. In the past, the group has simply responded to bankers' comments about credit unions as opposed to actually commenting on legislation, such as this, that does not affect credit unions. The organization also emphasized that Sub S banks have charged depositors slightly higher fees than other small and some large banks and posted returns on assets twice as high as peer institutions. CUNA pointed out that the average Sub S bank ROAs was 1.69% in 2001, while others with less than $100 million in assets earned 0.79% and non-subchapter S banks with less than $1 billion only reached 1.05%. CUNA highlighted Senator Wayne Allard's (R-Colo.)-who authored the Senate version of the bill-opposition to taxing credit unions. "Some voices are calling for the taxation of credit unions. I oppose it. Credit unions are not-for-profit businesses and should not be taxed," CUNA's testimony quoted him as saying. "Rather than competing with credit unions, it's more to maximize the dividends passed through to their shareholders," CUNA Legislative Affairs Manager Leon Peace, a tax specialist, told reporters. Recent statements by the banking industry, according to CUNA's testimony, indicate that the main reason banks want to expand Sub S is to maximize shareholders dividend and not to help set more competitive rates and lower fees. "So while the bankers complain that credit unions' tax status deprives them of a level playing field, the evidence suggests that a major reason for their competitive status lies with their failure to pass their tax savings along to their customers in the form of more competitive pricing," CUNA said. The group recommended Congress monitor whether banks' tax advantages are benefiting their customers or simply going into their shareholders' pockets. Subchapter S banks are not taxed at the corporate level. Instead the tax is passed onto its shareholders. Currently, only banks and other companies with 75 or fewer shareholders are eligible for Sub S tax status. Since its inception, about 1,900 banks have converted to Sub S status. CUNA also pointed out that banks are also seeking to be able to charter as limited liability corporations, which the Federal Deposit Insurance Corporation recently adopted a rule allowing, by including a provision in the House Financial Services Regulatory Relief Act to allow the Comptroller of the Currency to permit banks to organize as tax-favored LLCs. "If the remaining restrictions on the establishment of bank LLCs are removed, the number of banks that would be organized as LLCs could dwarf the number of Subchapter S banks-and banks would reap even greater tax benefits than the substantial ones already afforded under current law, CUNA's testimony pointed out. The Internal Revenue Service does not yet allow banks to charter as LLCs. Three bills-the Small Business and Financial Institutions Tax Relief Act of 2003 (H.R. 714); the Small Business Opportunity and Growth Act of 2003 (H.R. 1498); and the Subchapter S Modernization Act of 2003 (H.R. 1896)-have been introduced to significantly expand and enhance Sub S benefits. [email protected]

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