The IRS will be incorporating good governance principles in a "cyber assistant" in development as part of e-application for tax-exempt status and questioned "whether all tax-exempt organizations should be required to adopt a core set of good governance principles as a condition of obtaining or retaining tax-exempt status." Should they have to demonstrate efficient use of the tax-exemption?

CUNA President/CEO Dan Mica wrote Brown that he "must strongly object" to the IRS' letter that included what Mica termed as "the wrongful portrayal of credit unions as 'hard to distinguish from for profit banks'–thereby undermining the justification for credit unions' exemption from federal income taxation." He adds, "The letter also attempts to label credit unions as guilty by associating them with other industries that have recently received considerable public scrutiny in response to charges they should no longer be tax exempt."

Contrary to Brown's comments, California/Nevada Credit Union League President/CEO Bill Cheney said that rather than the lines blurring, they are becoming "more and more clear." He added that he was confident in the support of the credit union tax-exemption in Congress. "I'm not aware of any sort of groundswell…other than from the bankers," he commented.

NAFCU President/CEO Fred Becker also challenged the idea that the credit union difference is fading and that the tax-exemption helps to fund that distinction. "The ability of credit unions to continue to meet their purpose and provide services to their members depends heavily on their exemption from taxation," he wrote. "Most particularly, credit unions would have some difficulty maintaining the requisite capital levels to maintain safety and soundness without the tax exemption."

Venable, LLP Partner Bill Donovan noted that whenever Treasury or Congressional Research Service or Congressional Budget Office lists lost revenue "the tax exemption surfaces because of the way the tax exemption is accounted for." It is considered an expenditure, which can be "characterized" for the benefit of those who would like to see the credit union tax status changed, he said.

Despite the IRS acting commissioner's contention that the line between banks and credit unions is blurring, Donovan said, "People who have worked closely in the financial services area are able to see the various differences between banks, thrifts, or credit unions." He called them all "unique entities."

Mica reminded Brown that Congress decides who is tax-exempt and reaffirmed the credit union tax-exemption most recently in 1998 with the passage CUMAA. "Credit Unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means.

"These are critical distinctions that not only Congress but also the President has recognized."

Prior to the unearthing of the IRS letter, Treasury had listed the credit union tax-exemption as one way among several to lower the corporate income tax; a Treasury spokesperson explained that the report was a listing of possibilities and no decisions had been made.

CUNA's letter to IRS, under the Department of Treasury, also noted "IRS's difficulty in recognizing the differences between credit unions and commercial banks has manifested itself in the agency's treatment of unrelated business income taxation for state chartered credit unions." CUNA cited the IRS' technical advise memoranda on unrelated business income tax "that wrongfully subject activities such as sale of credit life insurance to UBIT, even though those activities and products are financial services that directly further the mission and purpose of credit unions as nonprofit member-owned financial cooperatives."

Cheney commented, "Seeing these things all coming one right after another, you might wonder what's going on." This type of situation has happened before and he does not think there is any bigger threat now than other times. However, he admitted, "I'd just as soon we not see that."

The circumstances just show more people are paying attention to credit unions, Cheney said. "I think we just need to continue telling our story," he said, referring to the leagues' advocacy campaign and others that are following in their footsteps.

According to Mica, the IRS did not even acknowledge the various credit union benefits for their members in its letter. "The letter also ignores the sizeable federal tax breaks and subsidies offered to the banking system as identified in a recent Government Accountability Office study…Rather than a groundless pursuit of credit unions, we question why the IRS is not reviewing banks' tax avoidance schemes, in light of this important GAO study."

He continued, "We remain very concerned that the highest ranking officials at the IRS have been provided the banker perspective while credit union representatives have not been afforded similar interaction at this level (we have been able to meet with some IRS officials but without full knowledge of the range of banker's charges)."

"More importantly" Mica emphasized, the IRS took five years to respond to a FOIA request from CUNA on banker communications with the agency, which allowed the bankers' sentiments to ferment at the IRS. He and Becker both requested a meeting with Brown.

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