Should the Earnings of Credit Unions That Convert to Banks be Taxed?

WASHINGTON – Should credit unions that convert to mutual banks and then go on to issue stock pay taxes on the retained earning they bring with them? Or should the retained earnings be channeled into an independent foundation or other charitable organization dedicated to fulfilling some of the credit union’s original purposes? The question did not originate with Representative Paul Kanjorski (D-Penn.), but the longtime legislative friend of credit unions gets the credit for bringing it out loud and clear into the public policy debate. Addressing a mixed panel of credit union-to-bank conversion opponents and proponents at a recent Congressional hearing, Kanjorski seized on the idea and would not easily be shaken from it. Since credit unions receive their tax-exemption in part because they serve a special purpose, why can’t society recoup those unpaid back taxes, Kanjorski asked, particularly if the credit union is converting to another type of institution that does not have that purpose? “Overall, I think it’s an idea that definitely needs study,” said Paul Hazen, CEO of the National Cooperative Business Association, an association of all types of cooperative businesses which serves as a center of expertise about cooperative business issues.

Hazen and other cooperative business leaders point out that credit union-to-bank conversions are unique among similar conversions, not only in the U.S., but worldwide, in that they are one of the only ones in which money from the converting nonprofit either passes on to the for-profit succeeding firm or to insiders and the public at large as a stock offering.