WASHINGTON -
The UBIT bid is a new initiative for the bankers, who have adopted several tactics in their credit union tax crusade.
In a letter to the IRS, the American Bankers Association (ABA) called on the tax agency to consider the taxability of the purchase or participation in non-member business loans when figuring the applicability of UBIT. "The (ABA) believes such activity is unrelated to a credit union's tax exempt purpose and would like the Exempt Organizations Examinations Division to subject the income derived by state-chartered credit unions from the purchase or participation in business loans to nonmembers to unrelated business income taxation," wrote Keith Leggett, senior economist for the ABA and the group's point-man on the tax fight with credit unions.
The ABA's latest bid comes as the UBIT debate with the IRS appears to be coming to a head, with the IRS issuing so-called Technical Advisory Memoranda to 15 state-chartered credit unions in Alabama and Connecticut laying out what it considers taxable under UBIT. The TAMs are not all-inclusive and are not legally binding and CUNA has expressed its intent to challenge them in court.
In his letter to the IRS, Leggett states that UBIT should be applied to state charters when they purchase or participate in a business loan to non-members. "The activity is outside the scope of a credit union's exempt purpose," he states.
He notes the soaring participation in nonmember business lending by credit unions in recent years, noting the number of state-chartered credit unions with nonmember business loan purchases or participation doubled from September 2005 to September 2006, with the dollar value soaring to $2.5 billion at Sept. 30, 2006. One state charter alone, Patelco CU, held 1,006 nonmember business loans, worth $426 million, at the end of the third quarter.
"The diversion of credit union resources away from members to nonmembers is not part of the tax-exempt purpose of credit unions," said Leggett. "Therefore, such earnings derived from lending to nonmembers should be subject to taxation."
It's not clear what weight, if any, the IRS will give the ABA's comments. But the credit union lobby is concerned that the bankers may be raising an issue that IRS examiners had not considered under UBIT.
For years, both the credit union lobby and the IRS sought to keep what is taxable under UBIT vague, in order to leave wriggle room when a new product or service emerged. But with the issuance of the TAMs last month, it appears as if the IRS is finally willing to set some specific parameters.
