MADISON, Wis-The first court challenge of the Unrelated Business Income Tax as applied to credit unions got under way last week with Community First CU and the Internal Revenue Service grappling over how the jury should be instructed.
The IRS has asked the judge to strike proposed language describing the purposes of a credit union that does not include the requirement under federal law that a credit union "operate without profit and for the mutual benefit of its members." That's because the IRS is seeking to prove that the sale of credit life, credit disability and guaranteed auto protection, or GAP insurance sold by Community First "does not inure to the mutual benefit of the members because the products are not good buys from the standpoint of the borrower."
The IRS also objected to language alluding to Wisconsin state law that authorizes state chartered credit unions to sell insurance. The sale of the insurance is not at issue, claims the IRS, but the payment of UBIT on those sales. "Moreover, it is not the role of the Wisconsin Department of Financial Institutions to decide whether income derived from such sales is taxable as unrelated business income," said the IRS in a pre-trial filing with the U.S. District Court for the Eastern District of Wisconsin.
In this case, one of two UBIT suits pending against the IRS, Appleton-based Community First CU is asking the court for a $54,604 refund of UBIT taxes it paid in 2006 on credit life, credit disability and GAP, insurance payments that the credit union claims are "substantially related" to its tax-exempt purpose.
Credit unions have been fighting with the IRS for decades over the calculation of UBIT-which are only assessed state charters. They say products and services like insurance are essential to their regular business purpose. Federal charters are not assessed UBIT because the Federal CU Act defines them as instrumentalities of the federal government, and thus exempt from taxation.
Bellco CU in Denver has also sued the IRS over a UBIT assessment and that case is still pending.
