WASHINGTON-In the latest salvo of a two-decade battle with credit unions, the Internal Revenue Service has issued a ruling declaring that revenues from shared branching, among other things, are taxable under the Unrelated Business Income Tax (UBIT).
Some of the products cited in the so-called Technical Advice Memorandum issued by the IRS, specifically credit life and credit life disability insurance, 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.
But the most troublesome 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.
Another issue raised is a cooperative agreement one credit union had to manage another credit union, which it affected through a CUSO.
The fight with the IRS is a long and heated one, with credit unions asserting that a variety of non-lending and non-deposit-taking activities, like the sale of insurance and investment products, are part of the CU tax-exempt mission, and the IRS claiming they are not.
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, 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.
TAM Contradicts Court Ruling
In the case of credit life products, the IRS TAM, issued May 5, contradicts 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.
IRS officials did not respond to phone calls seeking comment last week.
CUNA's Richard said they are considering challenging the latest IRS ruling in court.
