A Wisconsin credit union is pressuring the Internal Revenue Service to take a stand on whether income from sales of insurance products should be taxed.
The $1 billion-asset Community First Credit Union in Appleton is suing the IRS in federal court, seeking a refund of $54,000 on “unrelated business income taxes” it paid in 2006 on income from the sale of insurance products such as credit life, disability, and guaranteed auto protection.
Beyond recouping the money, Community First president and chief executive Catherine Tierney said, the suit aims to make the IRS take a clear position on credit unions’ sale of insurance products.
“They are refusing to take a definitive stand,” Ms. Tierney said in an interview. “Through the lawsuit we hope to gain a final determination that we can all look toward. … This is a test case.”
The outcome of the case could set a precedent that would either solidify or narrow the scope of which products sold by state-chartered credit unions are subject to taxation. Federally chartered credit unions do not have to pay taxes on unrelated business income, because they are considered agencies of the government under the Federal Credit Union Act.
Credit union experts say the IRS has taken a broad position: that the sale of insurance products is subject to unrelated business income tax for tax-exempt entities. It has issued situation-specific memorandums over the last few years about the taxation of insurance sales by credit unions, but it has not given the credit union industry explicit direction, leaving it up to the individual institution to decide if it needs to pay.
Ms. Tierney said Community First paid the taxes in 2006 at the urging of its accountants, immediately filed for a refund, and never received a response. It also plans to pay taxes on income from the sale of insurance products for 2007.
“There has been no dialogue with the IRS,” Ms. Tierney said. “It is hardly fair for some credit unions to have to pay the tax while others do not. The suit will force a definitive answer.”
The suit was filed Jan. 15 in the United States District Court, Eastern District Court in Green Bay. If the court rules for the IRS, Ms. Tierney said Community First will either consider charging more for the products or do away with them. She said it has offered insurance products since its inception in 1975.
Credit union advocates argue that the sale of insurance is pertinent to the purpose of credit unions and therefore should be tax-exempt. Taxing income from the sale of insurance products would ultimately harm consumers, said Brett Thompson, the president and CEO of the Wisconsin Credit Union League.
“That would mean a narrowing of products offered,” Mr. Thompson said.
The IRS would not comment for this story.
Eric Richard, executive vice president and general counsel of the Credit Union National Association, said that if Community First loses the case, “we will re-evaluate our options at the judicial level and maybe even take it up with Congress.”
Having the sale of insurance classified as tax-exempt would bring state-chartered credit unions on a level playing field with their national counterparts, Mr. Richard said.
The banking industry opposes any effort by credit unions to avoid paying taxes on insurance products. In a statement released the day the suit was filed, Edward L. Yingling, the president and CEO of the American Bankers Association, said: “Traditional credit unions earn their tax-exempt status by meeting the purposes set forth in their charter — to serve the needs of low-to-moderate income people by promoting thrift and providing low-cost credit to members. When credit unions offer products to nonmembers or offer services that are beyond their chartered purpose, they shouldn’t be given a tax break on those services.”
Keith Leggett, the ABA’s senior economist, said in an interview that bankers believe credit unions should also be taxed on income from other sources unrelated to the mission of taking deposits and making loans. Some examples: automated teller machine fees, check-cashing services and investment services. “We believe that Congress intended for the scope of this tax exemption to be narrow,” Mr. Leggett said. “It should not encompass the universe.”
