WASHINGTON – As an outgrowth of a three-decade-long battle, credit unions today will file suit in federal court against the Internal Revenue Service over its application of the Unrelated Business Income Tax, which taxes state chartered credit unions for activities the IRS deems unrelated to their main function of lending and collecting deposits.
At stake is millions of dollars in taxes state chartered credit unions pay every year. Federal charters are exempt from UBIT because they are defined in the Federal CU Act as instrumentalities of the federal government.
The suit will ask the court to order the IRS to repay taxes collected from one state chartered credit union on insurance products the credit union offers its members. Another suit also asking for repayment of taxes paid is expected to be filed in another judicial district in the next few months, sources told The Credit Union Journal.
CUNA and NASCUS (the National Association of State CU Supervisors), and the American Association of CU Leagues, which have coordinated the UBIT challenge, have signed on to the new suit.
The groups have been fighting the IRS for years over its interpretation of UBIT. In recent months, the IRS has issued technical advice memoranda which have roughly defined which products and services are taxable under UBIT, but the credit unions are dissatisfied with the guidance. The IRS stated that debit and credit card interchange fees, check printing, collateral protection insurance and member ATM fees are exempt from UBIT. But the IRS continues to maintain that income earned from most insurance and investment services provided to members is taxable.
