DENVER-State chartered credit unions could be entitled to millions of dollars of tax refunds from the IRS under a decision handed down by a federal court here.
In an early gift for tax day, the U.S. District Court for the District of Colorado ruled that Bellco CU is not responsible for hundreds of thousands of dollars in unrelated business income taxes paid on revenues earned from the sale of credit life and credit disability insurance. The ruling - which came eight months after a federal court in Wisconsin found state charters there not responsible for UBIT on credit life products-means credit unions that paid UBIT on those products may file requests for a refund from the IRS.
"They may file an amended form and ask for a refund. Some of them have already done that," said Eric Richard, general counsel for CUNA, which organized the two UBIT challenges.
The court 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.
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.
Earlier in the Bellco case, the court ruled that the $3 billion credit union also is exempt from UBIT on revenues earned from financial services, such as the sale of annuities and brokerage services.
CUNA's Richard said he hopes this will give credit union auditors greater clarity in preparing annual financials for credit unions, while giving pause to the IRS and its pursuit of UBIT from state chartered credit unions. "This means there is substantial authority if they're factual situations that resemble Bellco, they need not pay the tax," Richard told Credit Union Journal.
