CUs To Seek Refunds In Wake Of UBIT Action

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WASHINGTON-State-chartered credit unions may be lining up to seek refunds of taxes they paid under the IRS' unrelated business income tax rule (UBIT), now that the tax-collecting agency has abandoned its appeal of a court ruling that favored Bellco CU's challenge to UBIT.

"I'm not sure how many credit unions were paying [these taxes], as we were never able to get comprehensive data on that, but I would expect to see credit unions that were paying UBIT to ask for a refund," said CUNA's general counsel, Eric Richard. "Right now, our next step is to establish a dialogue with the IRS about its stance on UBIT going forward."

The hope, Richard said, is that the IRS will see the court rulings against it in the two UBIT test cases and stop requiring state CUs to file these taxes, but it is also possible the agency could determine that the court ruling are only binding in these two cases and do not require the agency to change its UBIT policies related to all state CUs.

"But there's a good chance the IRS will take a more enlightened view," he said.

In the latest development in the UBIT challenges, $3-billion, Denver-based Bellco CU and the IRS entered a stipulation to dismiss the appeal the IRS had filed.

At issue was the federal court ruling last November that the insurance and investment products Bellco sold its members, including credit life, disability insurance and some other products, stocks, bonds, mutual funds and annuities, were "substantially related" to Bellco's tax-exempt purpose, therefore income from those products was exempt from UBIT. Income from sales of accidental death and dismemberment insurance marketed by a third party via Bellco's mailing lists was held to be exempt royalty income.

The Bellco ruling was the second court victory over UBIT in the past year, following a separate decision in a challenge brought by Community First CU in Wisconsin.

The Bellco ruling is the latest chapter in a two-decade battle between state chartered credit unions and the IRS over UBIT, which is supposed to be assessed on exempt organizations on income earned from activities unrelated to their exempt purpose. In the Bellco case, the court found that credit life and credit disability insurance is related to a CU's exempt purpose of "promoting thrift" to its members, even if the IRS and others claim those types of insurance may not be a good deal for consumers. The court also ruled Bellco is exempt from UBIT on accidental death and dismemberment insurance it offered through a third-party provider, Affinion, because the revenues earned on the insurance amounted to royalties paid by Affinion.

Richard told CU Journal CUNA was already working to determine the best way to reach out to the IRS to discuss the UBIT situation, perhaps as soon as this week. While "the ideal outcome" would be for the IRS to make a public pronouncement, Richard said, it's possible the agency will remain silent on the matter. The credit union contingent hopes additional litigation related to UBIT will not be necessary, he added.

In the meantime, the fact that credit unions were victorious in both of the UBIT test cases and the latest round of appeals has been abandoned by the IRS means some credit unions likely will stop paying UBIT with the blessing of their auditors, and some may even seek refunds of past taxes paid.

"I believe the court rulings in these cases is enough for most credit unions' outside accounting firms to agree [that CUs do not need to pay these taxes], and a lot of auditors already agree," Richard observed.

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