Pub. 5 2010-2011 Issue 5

www.nebankers.org 14 Extraordinary Service for Extraordinary Members. These reports suggest that the association had taken title to the property yet it reported “other property owned” of just $4.27 million at Sept. 30, 2010. Perhaps the association was merely treating the loan as non-accrual—it reported $46.9 million of “impaired” loans at Sept. 30, 2010, which pre- sumably includes $40.2 million of nonaccrual loans; $19.1 million of the impaired loans had an associated loan-loss allowance. The association’s loan-loss allowance at Sept. 30, 2010, was $10.6 million. Unless FCS of the Virginias sold a substantial portion of the Kluge loan to other FCS associations, it may be greatly underreporting the magni- tude of its Kluge loan problem. Hopefully it will come clean about this lending fiasco in its 2010 annual report. If other FCS associations did buy participations in the Kluge loan, one must wonder how happy they are as this loan soured. Time to Fully Tax the FCS As bankers know all too well, the FCS pays very little in corporate income taxes—the profits on its real estate lending are completely tax exempt while the profits on its non-real estate lending are exempt from state income tax. Never very high, the FCS’ effective tax rate actually declined during the first nine months of 2010 to 5.42 percent—down from 6.49 percent for the first nine months of 2009. Had the FCS paid the standard federal tax rate of 35 percent plus state taxes, its tax bill for the first three quarters of 2010 would have been more than $1 billion, instead of the $151 million tax provision it reported. The FCS’ extremely favorable tax treatment was brought to mind by the recent Report on Tax ReformOptions issued by the President’s Economic Recovery Advisory Board. In a section of the report on special tax provisions that reduces the amount of tax that businesses pay, the report estimated that the tax exemption credit unions enjoy will cost the fed- eral government $19 billion over the 10-year period from 2008 to 2017. Unfortunately, the report does not mention the FCS tax exemption. Based on its current size and profit- ability and likely future growth, the FCS tax exemption will easily cost taxpayers more than $10 billion over that same 10-year period. Much of that tax savings comes from the FCS’ lending on non-production real estate. If there was ever an unjustifiable tax subsidy, this is it. Report FCS Lending Abuses Bankers are continuing to send Farm Credit Watch reports of FCS lending abuses such as FCS loans for rural estates, weekend getaways, and hunting preserves. E- mail reports of similar lending abuses in your market to green-acres@ely-co.com. Please provide as much detail as possible about any loan that violates the spirit, if not the law, governing FCS lending. Farm Credit Watch Free to ABA Members If your bank belongs to the American Bankers Association (ABA), you can enjoy a FREE e-mail subscription to FCW or you can read it monthly online at www.aba.com . To receive FCW by e-mail or to manage your subscription, visit ABA E-Mail Bulletins at www.aba.com and check or uncheck the appropriate boxes. For other inquiries, please contact Barbara McCoy at the ABA at 800-BANKER. Z To contact Bert Ely, e-mail bert@ely-co.com; fax (703) 836-1403; phone (703) 836-4101; or mail PO Box 320700, Alexandria, Va. 22320. Q Farm Credit Watch It ’ s Time toThink Long TermAgain . Despite recent economic troubles, the future is filled with opportunity. We’re here to help you make the most of it. www.woodsaitken.com DENVER LINCOLN OMAHA WASHINGTON, D.C. The tax exemption credit unions enjoy will cost the federal government $19 billion over the 10-year period from 2008 to 2017.