Patchwork Quilt of Directives From IRS Guide UBIT Reform
While falling short of setting uniform guidelines for credit unions and UBIT, the so-called Technical Action Memorandum received by seven credit unions each in Alabama and Connecticut notify credit unions what activities the IRS will consider taxable under UBIT. The TAMs are precedent-setting because the IRS has been previously reluctant to set clear guidelines, with potentially tens of millions of dollars of tax revenue at stake across the country. Credit unions have worked for years to keep this issue under wraps for fear of stirring up the bankers.
But CUNA, which has worked with other credit union groups in negotiations with the IRS, was clearly disappointed in the rulings, suggesting that some of the taxable activities cited by the IRS should be considered important to a credit union's main business of serving members, according to Eric Richard, chief counsel for the trade group. As a result, CUNA may have to go to court to get the IRS to finally set uniform guidelines. "We believe we are going to have to file litigation," said Richard.
The TAMs received by the credit unions over the past two weeks explain that the IRS will consider such popular activities as credit life disability, GAP insurance, accidental death and dismemberment, health and dental insurance, cancer insurance, car warranties and annuities, as well as ATM fees earned from non-members are subject to UBIT. The 14 credit unions also received claims for back payments of UBIT all the way back to 1999. With thousands of state-chartered CUs around the country offering some of these services the impact could be significant nationwide.
The burden would fall particularly on smaller credit unions that don't have as many resources to perform the accounting, some of which may not consider it worthwhile to offer some of these products because of low profitability, suggested Richard.
The CUNA lawyer said many of these activities were clearly contemplated as part of CUs' core mission at the time of the Federal CU Act, when CUNA Mutual Insurance was organized to provide them through the newly organized CUNA. "Insurance products have always been closely intertwined with credit unions; CUNA Mutual was founded the same time as CUNA," he said.
While the TAMs do not amount to legal guidelines, they will provide guidelines for the IRS and its national examiners, and also for independent auditors for credit unions.
CUNA, which has worked closely with CUNA Mutual, NASCUS and ACULE on this issue, hopes to bring this to a resolution soon, now that the IRS has issued the TAMs. "We want to move as quick as possible to get a reversal," said Richard.