Credit unions and Girl Scouts tax status compared

The claim that credit unions have the same tax status as the Girl Scouts or other similar organizations is kind-of-but-not-exactly-accurate. Here’s why.[1]

Girl Scouts are a 501(c)(3) organization. To obtain 501(c)(3) status, an organization must have a nature than can be described as “religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition, or prevention of cruelty to children or animals.”

Credit unions, obviously, do not fit into this category. Yet, when the claim is made that credit unions have the same tax status as the girl scouts, people probably think that means they’re 501(c)(3) organizations.

They are not.

In fact, they are 501(c)(1) or 501(c)(14) organizations.

Federal credit unions have 501(c)(1) status. They’re “corporations organized under act of Congress (including Federal Credit Unions)” and “instrumentalities of the United States.” 501(c)(14) organizations are described as “state chartered credit unions” that make “loans to members.”

So, while it’s certainly true that the Girl Scouts and credit unions share 501(c) status, they are granted that status for a different reasons, as evidenced by the tailing number: 1, 3, or 14.

Bankers probably know that credit unions don’t have the exact same status as the Girl Scouts, and they are probably meaning to say, “Credit unions don’t pay income taxes, rather like how the Girl Scouts don’t pay income taxes.”

However, the implications of the comment are that only charities deserve a tax exemption. This is simply a red herring. There are many reasons to be exempt from taxes, which Congress has enumerated over many years. In fact, the IRS code gives about 26 reasons for tax exemptions.

Interestingly, Subchapter S corporations—which make up 33% of banks—are pass-through organizations. This means they don’t pay Federal income tax.[2] So, while they are not 501(c) organizations, the net effect is that like 501(c) organizations: they don’t pay taxes.