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WASHINGTON – In the last counterattack from CUNA, Associate General Counsel Mary Dunn has asked the Internal Revenue Service to look into why banks were permitted to organize as Subchapter S Corporations and what they are doing for the public with the preferential tax treatment. Despite the fact the bankers are asking that credit unions be required to document their service to their communities, CUNA suggested that Sub S banks explain how they earn their Sub S tax treatment, which allows the bank to avoid paying corporate taxes by passing taxation through to the shareholders. “It is clear that Congress wanted to give small businesses favorable tax treatment under Subchapter S to encourage their growth and development,” Dunn wrote. “What is less clear is why banks were provided Subchapter S election-authority. Subchapter S status bestows an enormous public benefit on the banking institutions that make use of this preference. In light of this fact, we respectfully request the agency to consider collecting information from Subchapter S banking institutions that shows how they use this tax preference to benefit the public and their communities.” The attorney said in an interview that she did not believe that Community Reinvestment Act requirements necessarily show what a bank is doing for a community and that the call for Sub S banks to do more reporting should not affect bankers’ requests for credit unions to do the same. “I don’t think they’re going to say anything they haven’t already said and it’s time to point out this hypocrisy,” Dunn said. She added that the Sub S preferred tax treatment is like a grant from the public and the banks should have to demonstrate how they are using it. Dunn’s letter states that Congress created Sub S in 1958 to allow small businesses another corporate structure option without having to figure out the most advantageous tax treatment. “Then, with little explanation, in 1996 Congress authorized banks to elect Subchapter S status,” CUNA explained. “Today, there are 2,010 banking institutions (banks, savings and loan associations) with $272 billion in assets that enjoy Subchapter S status.” Sub S banks with more than $250 million in assets total 248, while 18 hold more than $1 billion in assets. “It is inequitable and hypocritical in the extreme for banking organizations to apply a litmus test of size to credit unions while such relatively large banks are taking advantage of Subchapter S authority to avoid tax liability,” Dunn’s letter pointed out. “We urge the IRS, through its data collection process, to monitor the size of such banking institutions and work with Congress to address whether billion-dollar banks should be the beneficiaries of treatment intended for small businesses.” Though she did not have numbers for the comparable size credit unions, Dunn later explained, “The point here is not so much how credit unions compare with them but that they’re saying all credit unions, and particularly large credit unions, should not be tax exempt.” CUNA’s letter also outlined a scheme that some banks run to avoid the 75 maximum shareholder requirement for Sub S status. Bank directors must own shares in their institution under regulation by the Office of the Comptroller of the Currency. However, some banks have set up a system where the directors transfer their stock to the bank to comply with that rule while maintaining 75 shareholders or less for the Sub S preferential tax treatment. “This raises the question of who has the real ownership of that stock,” Dunn said. The IRS has issued a private letter ruling to afford banks flexibility in this area, which CUNA argued is “non-precedential and non binding on the agency.” Legislation for greater flexibility is also pending. CUNA’s letter suggested that since Congress has not addressed this issue, the IRS ensure Sub S banks do sufficient reporting of their usage of such agreements through a rulemaking. The IRS requested comment on the election, revocation, termination, and tax effect on Sub S status Feb. 25. CUNA staff has been directed to look for opportunities to emphasize the bankers’ hypocrisies on the tax issue. While scouring the Federal Register, this opportunity just “fell in our laps,” Dunn said. [email protected]

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