WASHINGTON – CUNA offered guidance on Unrelated Business Income Taxes to state chartered credit unions yesterday, saying the recent court ruling in the Community First CU case represents substantial authority to exempt all income earned from credit life and disability insurance and GAP coverage from UBIT.
While suggesting that each credit union consult with its own auditor, CUNA said it believes that a credit union will not be subject to any penalty if it files its UBIT return treating credit life and disability and GAP income as exempt.
The position was laid out in a memo by attorneys Foley & Lardner, who represented Community First CU in the successful court case earlier this year. In that case, the federal court ordered the Internal Revenue Service to refund $54,000 on taxes and interest to the Appleton, Wis., credit union after it found income from those products "substantially related" to the tax-exempt purpose of a credit union.
The lawyers warned the IRS may still assert that credit life and GAP income are taxable under UBIT, but credit unions and their auditors should be exempt from any civil penalties if they take that position.
Only state chartered credit unions must pay UBIT because federal charters are considered instrumentalities of the federal government under the Federal CU Act, and thus are exempt from all federal taxes.
