GREEN BAY, Wis. – In a case with national ramifications, a federal judge yesterday ruled the Internal Revenue Service erred when it assessed more than $54,000 of unrelated business income taxes, known as UBIT, against Community First CU.
The Appleton, Wis.-based credit union had challenged its UBIT assessment on three credit insurance products, saying the offering to members was related to its main purpose.
The government has 10 days to file a petition to ask for a judgment as a matter of law in which the judge could rule that the jury made the wrong legal decision.
Credit unions have been fighting the IRS for years over UBIT, which is only applied to state charters because federal charters are considered as "instrumentalities of the federal government" and therefore exempt from all federal taxes, under the Federal CU Act.
The Community First case is one of two pending before the federal courts challenging UBIT assessments for credit unions. Denver-based Bellco CU is also challenging its UBIT assessment. Bellco seeks a refund of $199,000, based on UBIT taxes paid for 2000, 2001 and 2003.
In this case, Community First CU is asking the court for a $54,604 refund of UBIT taxes it paid in 2006 on credit life, credit disability and GAP, insurance payments that the credit union claims are "substantially related" to its tax-exempt purpose.
In its closing argument, the credit union argued that all the insurance products are related to all of the credit union's purposes under Wisconsin law; that the insurance and GAP products are a source of credit with fair and reasonable rates and are directly connected to the loans made; and that the credit union educated members about the products to improve their financial conditions.
