WASHINGTON – In the latest blow to state chartered credit unions, the Internal Revenue Service has issued a ruling declaring that revenues from shared branching, as well as from some CUSOs and the sale of certain insurance products are all taxable under the Unrelated Business Income Tax, of UBIT.
Some of the products cited in the so-called Technical Advice Memorandum issued by the IRS were already struck down by a federal court two weeks after the May issuance of the TAM, so it is unclear what effect this will have on UBIT filings.
The most important issue raised in the TAM is that of shared branching, according to Eric Richard, general counsel for CUNA, which is involved in two separate UBIT lawsuits challenging the IRS.
In private meetings with IRS representatives, the IRS has conceded that the cooperative structure of credit unions requires that they collaborate on services such as branching, said Richard.
Credit unions have been fighting the IRS interpretation of UBIT for two decades. Only state charters pay UBIT because federally chartered credit unions are considered instrumentalities of the federal government under the Federal CU Act and are exempt from all taxes.
The new IRS TAM, issued to an unnamed credit union whose name was blacked out, also suggests that the sale of mutual funds, credit life and credit disability insurance and a management agreement for one credit union to operate another are all subject to UBIT. The operative word is "suggests," because the TAM are not orders, but directives related to the party (credit union) in question, noted Richard. As such, they are considered guidance for auditors and other preparers of financial statements.
In the case of credit life products, the IRS TAM, issued May 5, flies in the face of a federal court ruling May 18 supporting Community First CU’s lawsuit challenging the application of UBIT to the sale of credit life and credit disability insurance.
A second UBIT challenge by Bellco CU of Denver, which is disputing the IRS assessment for its sale of credit life disability insurance, accidental deal and disability insurance, is expected to go to trial in the fall.
CUNA’s Richard said they are considering challenging the latest IRS ruling in court.
