Inure is an intransitive verb meaning “to become of advantage.” While the concept isn’t exactly related to credit union income tax exemption, it is related to other organizations’ income tax exemption, and credit unions bear significant similarity to those organizations as it relates to inurement.

In brief, credit union retained earnings inure—become of benefit—to no particular member, volunteer, or employee of the credit union.

Although credit unions are not 501(c)(3) organizations, 501(c)(3) organizations are listed as being tax exempt and that “no part of the net earnings of which inures to the benefit of any private shareholder or individual.” 501(c)(3) are what most people think of when they think of tax-exempt organizations: charities, churches, community foundations, etc. In fact, there are 25 categories of tax-exempt organizations. All are 501(c) organizations. Of the 25, nine include phrases that speak to the idea of “inurement”.

The Nonprofit Risk Management Center says this about inurement:

“A 501(c)(3) organization is prohibited from allowing its income or assets to benefit insiders (people with a personal or private interest in the activities of the organization),” said Crom. “Insiders are typically board members, officers, directors, and important employees.” He added that prohibited inurement includes the payment of dividends, the payment of unreasonable compensation to insiders, and the transfer of property to insiders for less than fair market value.

The concept of inurement states that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual who, because of the person’s relationship to the organization, has an opportunity to control or influence its activities.

If a 501(c)(3) organization engages in inurement or substantial private benefit, the organization risks losing its exemption. Additionally, insiders guilty of inurement may be subject to excise tax.^[1] (Emphasis added.)

In regards to property law, inure means to vest, which essentially is granting a fixed, immediate right of current or future enjoyment. This is important since it means that an individual now has an absolute right to a current or future interest in something of value.

While “inurement” is not named in the tax code regarding credit unions, credit unions meet the “inurement” requirement that is required of many not-for-profit companies. Credit union directors and executives, for example, do not receive any stock benefits for running the credit union, since the credit union does not issue stock in the first place. This is different than some banks, where some directors and employees may receive compensation in the form of stock options.[2] [3]

In addition, the increase of retained earnings at a bank usually increase ethe price of a piece of stock in that bank, and any individual stockholder can immediately sell that stock for the increased price. In this way, owners benefit immediately from the banks’ increased retained earnings.

Credit union members, not owning a piece of stock which they can sell, do not have any immediate benefit from a credit union’s increase in retained earnings. In fact, no one does.

For this reason, taxation of retained earnings and net income of credit unions is deferred to a later time, such as when they are paid out in dividends and they inure to the benefit of specific individuals.

But as long as the credit union retains those earnings, they inure to the benefit of no individual, but to the credit union as a whole.