MADISON, Wis. -
The Appleton, Wis., credit union is asking the court to rule that $208,000 earned last year through the sale of credit life and credit disability and guaranteed auto protection (GAP) insurance is exempt from UBIT and to direct the IRS to refund the $54,600 in UBIT payments made by Community First.
The credit union paid the taxes, then filed with the IRS for a refund, and waited six months without hearing back from the IRS, before filing its challenge in the U.S. District Court for the Eastern District of Wisconsin.
“The products at issue here are financial services, and they contribute to the financial stability of the credit union and our members,” said Catherine Tierney, president of the $950-million credit union. “They are well within the purpose of credit unions and should not be taxable.”
Standing Up For Members
“What we’re doing here is standing up for our members,” said Tierney, “because it’s the members who will bear the brunt of this (tax) if this ruling stands up.”
The stakes for credit unions are enormous, with thousands of credit unions offering one or more of the products at issue, and millions of dollars in UBIT paid.
The suit is the outgrowth of a two-decade-long fight that state chartered credit unions have had with the IRS over UBIT, which purports to tax income from products and services that are “not substantially related” to the tax-exempt status of a credit union. Federal chartered credit unions do not pay UBIT because the Federal CU Act defines them as instrumentalities of the federal government, and thus, exempt.
Originally, the IRS considered all products and services that were not directly related to the core functions of a credit union, mainly deposit-taking and lending, to be taxable under UBIT. But in recent years the IRS has conceded several other products and services as justifiably related, including debit and credit card interchange fees, check printing, collateral protection insurance and member ATM fees.
But the IRS continues to maintain that ATM fees earned from non-members, certain investment income, and insurance activities, like credit life and credit disability and GAP, are not related to the core function of a credit union and are taxable under UBIT.
As reported first by Credit Union Journal, the UBIT Steering Committee had been looking for “the right plaintiff” to bring this issue to court and indicated it was working with several potential plaintiffs (CU Journal, Jan. 7).
Community First earned $189,548 from the sale of credit life and credit disability insurance to members last year, and another $18,456 from the sale of GAP insurance, which pays a credit union the difference between the value of a vehicle and the value of a loan amount on defaulted vehicle loans.
After combining the income earned with losses on other products, the credit union came up with net income of $182,960 on line 34 of its Form 990-T, and paid UBIT of $54,604.
Products Are Popular With Members
These products are popular among credit unions, with more than 77% of credit union offering one or the other, according to Larry Blanchard, senior vice president for CUNA Mutual Group, which offers the insurance products and has helped coordinate the UBIT challenge. “We’ve been trying to work with the IRS for over 10 years to come up with a resolution and have made some progress. But the IRS says this is not the statutory purpose of a credit union,” said Blanchard.
Eric Richard, chief counsel for CUNA, which also helped plot the UBIT challenge, said they have been looking for a credit union to serve as a test case on a UBIT challenge for some time and Community First CU agreed to do so. He said credit unions are planning an additional UBIT challenge which they expect to file with the courts in the next few months.
Changing Landscape, Changing Business
Mary Martha Fortney, president of the National Association of State CU Supervisors, which has also helped coordinate the UBIT challenge, noted the changing economic landscape and its affect on the definition of related business activity for credit unions. “State regulators and state legislators have long recognized that credit unions must evolve their products and services to meet the needs of their members,” said Fortney. “The IRS must understand that credit unions offer certain products to their members in an effort to promote thrift and savings, as a part of the credit union’s purpose.”
Also helping in the UBIT case was the American Association of CU Leagues.
NCUA, which does not regulate state charters, has stayed clear of the case but has monitored the issue.
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