The IRS and Credit Unions Need to Get Real on UBIT
UBIT, UBIT, UBIT...no it's not a bad imitation of a frog croaking, it's the IRS' Unrelated Business Income Tax and it's about to move to center stage.
The IRS has recently advised that income from credit insurance products and nonmember ATM fees is subject to UBIT! Not good news for credit unions to say the least.
What is UBIT? It's a tax on nonprofits on income that is considered to be substantially unrelated to the organization's primary mission. Interestingly, it only applies to state chartered credit unions--federal charters are exempt.
The problem is the IRS doesn't seem to know what a credit union's primary business is.
To say credit life is not directly related to a credit union's business of making loans is hard to fathom. Credit unions don't offer credit insurance for kicks. It is offered to help members protect themselves should they be unable to meet their loan obligations. This also in turn protects the credit union. Attention IRS, it's related to credit unions' mission, end of story.
Designating nonmember ATM fees as UBIT is more plausible, but still a stretch. Credit unions offer network services to their members. They are not reaching out and looking for nonmember business, but of course that will come based on ATM placement, etc. The credit union should not have to offer ATM services at no charge to individuals who do not support the credit union. The IRS is off base here as well and needs to wake up.
The IRS is showing a frightening lack of knowledge of financial products. It has even ruled that annuities are subject to UBIT because they are not savings vehicles! Did annuities change? How are they not savings vehicles?
Let's not be na?ve. There are plenty of credit unions offering services that could legitimately be considered unrelated and there are credit unions out there that have been paying UBIT for years. Here is where credit unions need to wake up and smell the UBIT. Selling members tickets to events would fall under UBIT and credit unions are doing that. Some credit unions offer logowear (online and in branches)--not related. What about car buying services? Sure in most cases it leads to a credit union auto loan, but I don't think helping the member pick out the right car could be considered part of a credit union's business. (The IRS did rule that car warranty services are unrelated.)
So yes the IRS has plenty to pick on, but it needs to stop playing dumb on what a credit union does, then it will realize credit insurance and nonmember ATM fees are indeed related.
Allowing the IRS to define a credit union's business model is a nightmare come true. They have shown they are in no position to do so. The IRS is living in the past with credit unions and its view of credit unions has not evolved as credit unions have. You can't look at the business of credit unions in the 1930s and compare that to today, but that's exactly what the IRS is doing.
Unfortunately, this issue has to go to court, and go to court fast. For those who worry this will give bankers more ammunition for the tax-exemption argument, don't. The bankers don't want to get in on this UBIT fight for a number of reasons, trust me.
Here's what concerns me. Credit unions cannot let this become a federal vs. state issue. This is an issue for all credit unions because what's at stake is the very definition of what a credit union is. I think federal credit unions should follow this very closely for that reason and also that the whole notion that FCUs are "instrumentalities" of the federal government and thus exempt from UBIT could be shot down very easily. If that fight ever comes up, yes it would require a change to the law, but it could very well happen and FCUs will suddenly be in the UBIT pool.
This can't become an "us vs. them" deal on the association level either. I think the UBIT Steering Committee, consisting of CUNA Mutual, NASCUS, CUNA and the American Association of Credit Union Leagues, should have also included NAFCU. What's the harm?
I also hope UBIT doesn't have the type of effect the Utah tax fiasco had on Utah state charters and we start seeing mass conversions to the federal charter. Dual chartering is too important to the health of the industry. But unfortunately it has happened already. Credit unions have converted because of UBIT. It hasn't been widespread, but then again this recent guidance from IRS is still fresh. A lot of people believe the threat of UBIT was a big factor in the conversion of U.S. Central from a state to a federal. If U.S. Central doesn't open eyes, I don't know what credit union can. --Comments? E-mail email@example.com