Bellco Credit Union doesn't have to pay unrelated business income tax on its income from credit insurance or on royalties from accidental death and dismemberment insurance.
On a technicality, the credit union will have to pay UBIT on income derived from credit insurance sales via the Credit Union Indirect Lending Association, a federal judge ruled on April 2.
"In the banking and credit union context, the concept of thrift is tied to sound financial management.... Credit insurance does just that.... For a relatively marginal payment, the borrower buys peace of mind," U.S. District Judge Christine Arguello wrote.
"Giving members a convenient way to purchase insurance that protects them, their families and their assets in the event of a catastrophic event certainly qualifies as a mechanism for careful management of the borrowers' money. None of the government's arguments convince the court otherwise," she said in the decision in the suit filed by the Greenwood Village, Colo.-based credit union against the IRS.
The judge upheld the UBIT on Bellco's profits on credit insurance through the CUILA because system changes led to inadequate data for 2000 and parts of 2001. She ruled that the credit union couldn't prove that the income excluded items that weren't tax exempt.
Bellco had asked for a refund of $199,295 paid in UBIT, and now there will be a conference between both sides to determine how much will be refunded and how much UBIT the credit union has to pay on income from products sold through the CUILA in 2000 and 2001.
Once that conference occurs, if both parties agree, they will submit a proposed order to the judge, and if the judge approves it, the federal government has 60 days to decide if it wants to appeal Arguello's decision. If the parties don't agree, there will be a schedule for each side to submit briefs to the judge, and the judge will enter an order resolving the issues. Then, the government would have 60 days to file an appeal.
Arguello's decision marks the second credit union victory on UBIT in less than a year. Last May, an eight-member jury ruled that the government must refund Community First Credit Union of Appleton, Wis., $54,604 paid in UBIT on sales of financial products.
CUNA General Counsel Eric Richard said the Bellco decision upholds the approach that credit unions have taken when determining what products are subject to a UBIT, which is only levied on state-chartered credit unions.
"When Judge Arguello analyzed the facts and reviewed our analyses, she came down firmly on our side. This will also provide additional guidance to credit unions," he said.
He added that the fact Bellco will have to pay some UBIT because of the lack of documentation doesn't detract from the overall victory.
"The recordkeeping system changed after they merged with another credit union, they hadn't set up the new documentation system," Richard noted.
Arguello rejected Bellco's claim that the credit insurance shouldn't be taxed because it preserves capital for the credit union and avoids forcing Bellco to make up for bad loans by taking from earnings or capital. She said that existing regulations "expressly bar such a claim."
However, she ruled that the credit insurance was tax exempt because Bellco met its burden to show that it promotes member thrift.
There was some overlap between the products in dispute in the Bellco case and in the Community First case.
Community First maintained that its sale of credit life insurance, credit disability insurance and guaranteed auto protection insurance were substantially related to its tax-exempt mission. The government had maintained that those sales were taxable. But the government declined to appeal the jury verdict.
Both Bellco and Community First's staff worked with the UBIT Steering Committee to devise and implement legal strategies.
Bellco President/CEO Doug Ferraro said, "This latest ruling markes a great day fo Bellco and all credit unions.".