WASHINGTON–In response to a demand by more than 50 bank trade groups that Treasury conduct a study on whether credit unions continue to deserve a federal tax exemption, the Defense CU Council has sent a letter of its own requesting Treasury conduct a study of certain bank practices.

As the CU Daily reported here, the bank groups told Treasury that since the Federal Credit Union Act was enacted in 1934, “…credit unions have become increasingly complex, and their recent activities call into question whether they should still qualify for their tax exemption.”

In response, DCUC sent a letter to Ken Kies, assistant secretary of the Treasury, urging the department to conduct a comprehensive study into the implications of banks’ use of Subchapter S corporation status.

In the letter, DCUC’s chief advocacy officer, Jason Stverak, expressed concern that banks’ exploitation of Subchapter S status—originally designed for small businesses—is creating “serious regulatory loopholes, competitive imbalances, and transparency gaps.”

Nearly $2 Billion in Taxes

Stverak noted that more than 2,000 banks currently operate under the tax designation, avoiding federal corporate income tax and collectively saving an estimated $1.8 billion in 2022 alone.

“Banks leveraging Subchapter S enjoy significant tax breaks with little public scrutiny or accountability,” said Stverak in a statement.  “Meanwhile, credit unions continue to face unfounded criticism for their longstanding tax-exempt status. If fairness is the goal, these tax models, with their massive fiscal implications, deserve equal examination.”

The Key Concerns

According to DCUC, its key concerns include:

• Regulatory Gaps. “Subchapter S banks may bypass prudential norms through aggressive dividend distributions, threatening capital resilience,” DCUC said.
• Market Imbalance. “While credit unions reinvest earnings into member benefits and community service, many Subchapter S banks funnel profits to a small group of private shareholders.”
• Lack of Transparency. Subchapter S banks are not required to disclose corporate tax payments or community reinvestment data, raising questions about their contributions to public good.
• Equity and Fairness. “The disparity in scrutiny between credit unions and banks with substantial tax advantages undermines equitable financial policy,” DCUC said.

‘Fact-Based Examination’

DCUC said it is calling on Treasury to lead a fact-based, public examination of whether the current use of Subchapter S aligns with congressional intent and serves the broader interests of financial system safety, soundness, and fairness.

“It’s time to bring transparency to this little-known corner of the banking industry,” Anthony Hernandez, president/CEO of DCUC, said in a statement. “Bank lobbyists can’t continue to selectively spotlight tax issues only when it suits their narrative against credit unions. Policymakers and the public deserve a full and fair accounting of whether Subchapter S is fulfilling its intended purpose—or being exploited as a tax shelter by large, for-profit banks.”

Meeting Requested

DCUC said it has also requested a meeting with Treasury officials to further discuss its concerns and share supporting data, and express its “commitment to a balanced, objective dialogue that strengthens the financial system for all Americans.”