History of State-Chartered Credit Union Tax Exemption
In the Revenue Act of 1951, Congress revoked the tax-exempt status of mutual savings banks, domestic building and loan associations, and cooperative (community) banks because their operations had shifted to become more like commercial financial institutions.
Instead, Congress expressly provided for exemption of credit unions without capital stock organized and operated for mutual purposes and without profit. The fact that Congress maintained tax exemption for credit unions suggests that credit unions were distinct enough from commercial financial institutions to warrant continued exemption.
Congress also expressly provided exemption for organizations formed before September 1, 1951, and operated for mutual purposes and without profit to provide reserve funds for, and insurance of, shares or deposits in certain savings institutions.
Credit Union Tax Exemption Requirements:
(1) Without capital stock. The Code and Regulations require that credit unions described under Section 501(c)(14) must not have capital stock. The United States First Circuit District Court considered the meaning of without capital stock. The court determined the shares of stock distributed by the financial institution in question were not capital stock because the shares were owned by the members and could not appreciate in value. In this case, the cost of a share was $5.00, which was the same as when the institution was established, and the institution would buy back any share for $5.00; thus, there could be no gain or loss.
(2) Mutual purposes. As required in the Code and Regulations, a credit union described in Section 501(c)(14) must be organized and operated for mutual purposes. A credit union must operate for the mutual benefit of its members and without profit – as required in the Code and Regulations – in addition to being chartered under a state’s credit union law, to be exempt from federal tax under Section 501(c)(14)(A).
(3) Without profit. The Code states credit unions described under Section 501(c)(14) must be operated without profit. A credit union must operate without profit and for the mutual benefit of its members – as required in the Code and
2025 BANK LOBBYING INIATIVE
Banks and community banks have recently intensified their lobbying efforts to the U.S. Congress to end the credit union tax exemption due to the increase of community bank purchases by credit unions across the country.
Here are some talking points that refute this disingenuous attempt to end the credit union difference:
Credit unions remain steadfast not-for-profit cooperatives owned by the member communities they serve.
The historic difference between causing Congress to grant credit unions tax exemption remains.
The trend in community banks and independent banks selling their assets demonstrates why for-profit banking does not survive in smaller underserved and underrepresented communities. This is because these smaller banks only remove capital from those communities until there is no profit for them left.
Bigger banks are not interested in serving communities when smaller and community banks close and sell their assets because they do not see the (for) profit in doing so.
This is why banks need to be constantly monitored to comply with the Community Reinvestment Act.
Credit unions serve these bank abandoned communities by stepping in to provide communal access to high quality financial services and access to opportunities to fuel their individual and entrepreneurial dreams.
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