WASHINGTON—One day after 52 state bankers associations called on the Treasury Department to examine whether credit unions still align with the intent of their tax-exempt status, the Defense Credit Union Council is urging Treasury to launch a formal review into the implications of banks operating under Subchapter S corporation status.
As the bankers Tuesday sent their request to Assistant Treasury Secretary Ken Kies, DCUC addressed its letter to Kies, as well. As CUToday.info has reported, credit unions have expressed concerns about Kies’ role in Treasury, due to his past record on credit union taxation. Just over ten years ago Kies co-authored a seven-page report for Deloitte that advocated the repeal of the federal tax-exempt status for credit unions of all sizes.
In its letter, DCUC stated to Kies that the trade group is “deeply concerned” that banks’ “exploitation” of the Subchapter S election is creating regulatory loopholes, competitive imbalances, and transparency deficits in our financial system, effectively allowing certain banks to evade a fair contribution to the system’s well-being.
“These issues warrant the same level of scrutiny that some have recently demanded for credit unions’ tax status,” wrote DCUC Chief Advocacy Officer Jason Stverak. “Simply put, if fairness and integrity are the goals, then all significant tax-advantaged frameworks in banking – not just credit unions’ – deserve a hard look.”
Stverak pointed out that Subchapter S status allows eligible banks to avoid federal corporate income tax by passing income directly to shareholders.
“This special tax treatment, originally intended to help small businesses, has been aggressively leveraged by the banking industry. Over 2,000 banks – including some large institutions – use the Subchapter S election to entirely bypass corporate taxes, saving an estimated $1.8 billion in 2022 alone,” wrote Stverak. “This figure underscores that Subchapter S is not a minor niche, but a widespread practice with major fiscal implications.
“Yet, while Congress has not formally revisited credit unions’ tax treatment in nearly 20 years, banks’ use of Subchapter S has never undergone an equivalent public examination in recent memory,” continued Stverak. “The result is a growing segment of the banking industry operating under the radar of comprehensive policy review. We believe the Treasury Department, under your leadership, should correct this oversight by studying whether banks’ current utilization of Subchapter S aligns with the intent of the tax code and the safety, soundness, and fairness expected in our financial system.”
Stverak added DCUC’s concerns extend beyond the “obvious matter” of tax revenue.
“Regulatory loopholes appear to have emerged alongside Subchapter S usage,” he stated. “Banks electing S-corp status enjoy certain regulatory accommodations that warrant examination. For instance, industry observers have noted that S-corp banks often distribute a large share of their earnings as shareholder dividends (to cover those shareholders’ personal tax liabilities), a practice that might be constrained under normal prudential rules for capital retention. In effect, the S-corp framework may enable institutions to work around regulatory norms intended to bolster bank resilience. We urge Treasury to evaluate whether capital adequacy, loss absorption, and oversight standards are being undermined by rules or exceptions associated with Subchapter S banks.”
Read the full letter here.