The decades-old troubles by state-chartered credit unions over the Unrelated Business Income Tax (UBIT) is threatening to drive state chartered credit unions to the safety of the federal charter.
The state banking department said it has approved a request from Stamford CU to switch back to a federal charter, which will erase the threat of UBIT for the $45-million credit union, a scant two years after converting to state charter. Stamford CU, which was known as Stamford Municipal Employees FCU until August 2001, is one of 49 state- chartered credit unions being audited by the Internal Revenue Services for potential liability under UBIT. A federal charter shields credit unions from UBIT, which only applies to state credit unions.
Several other state-chartered credit unions being audited by the IRS are said to be considering a charter conversion to get out from under the thumb of the IRS, which has been auditing as many as 60 credit unions in Connecticut, Alabama and Colorado in recent months for UBIT.
Among the income being eyed by the IRS for UBIT liability are revenues earned from non-member ATM transactions, credit life disability, and leveraged investments, such as reverse repurchase agreements. Federally chartered credit unions are exempt from UBIT.