IRS Drops UBIT Bid In Victory For State Chartered CUs

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WASHINGTON – The Internal Revenue Service on Tuesday abandoned an appeal of a ruling favoring Bellco CU in the Denver credit union’s challenge of the unrelated income tax, or UBIT, handing state chartered credit unions a second legal victory over the IRS in the past 12 months.

Both parties to the suit, the IRS and the $3 billion credit union, entered a stipulation to dismiss in the U.S. Court of Appeals for the Tenth Circuit in Denver yesterday.

Only state chartered credit unions are subject to UBIT because the Federal CU Act considers federal charters as instrumentalities of the federal government and thus exempt from all federal taxes.

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 credit union’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 found that 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.


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