IRS Concedes on UBIT
After a 15-year effort, and two cases lost in federal court, the IRS has apparently conceded defeat in its battle with credit unions over the Unrelated Business Income Tax.
CUNA announced Wednesday that the IRS issued a memo late last month that frees products that include card interchange fees, ATM per-transaction fees and interest on credit card loans, among other items, from being subject to the UBIT.
“The IRS memo signals that credit union tax refunds for past UBIT payments should now be processed,” Larry Blanchard, a CUNA Mutual Group consultant and chairman of a coalition of industry groups that supported the litigation, said in the announcement. “This is clearly a breakthrough with the agency.”
The CUNA announcement also advised credit unions to discuss with their tax advisers whether to make future tax payments to the IRS on the same products.
“In any event, this is a welcome and well-deserved development for credit unions,” Blanchard said. “The IRS memo reflects the agency’s appreciation for rulings of the courts, namely that the credit union mission to serve members extends well beyond loans and savings accounts.”
The UBIT Steering Committee includes NASCUS, CUNA, CUNA Mutual Group and the American Association of Credit Union Leagues.
“That the IRS has finally taken this step is welcome news,” said NASCUS President/CEO Mary Martha Fortney. “It has been a long time coming, and is a significant win for the entire credit union system.”
The three-page memo issued on March 24 said the following income-producing activities are now not subject to UBIT:
· Sale of checks/fees from a check printing company
· Debit card program’s interchange fees
· Credit card program’s interchange fees
· ATM per-transaction fees from members
· Interest from credit card loans
· Sale of collateral protection insurance
· Credit life and credit disability insurance
· GAP auto insurance
CUNA said the income from the last two items is not subject to UBIT if the products are sold to members. Royalty income from the marketing of accidental death and dismemberment insurance to credit union members is also exempt.
The two court cases were won by the $2 billion Community First Credit Union of Appleton, Wis., in 2009 and the $2.5 billion Bellco Credit Union of Greenwood Village, Colo., in 2010. In the Community First case, an eight-member jury ruled in May 2009 that the government must refund Community First Credit Union of Appleton, Wis., $54,604 paid in UBIT on sales of financial products.
In the Bellco case, a federal judge ruled that the credit union didn’t have to pay the UBIT on income from credit insurance or royalties from accidental death and dismemberment insurance. The Justice Department had said in October 2010 that it would not appeal the Bellco decision that stemmed from the credit union's 2001 tax return.
“After 15 years of work – and millions of dollars in litigation expenses – it is ironic that a breakthrough in a struggle of this scope comes down to a three-page memo,” Blanchard said. “But the effort has been entirely worth the time and money.” Blanchard said the committee will continue to press the IRS to clarify guidance that it provides examiners on products and services decided by the two court cases, and earlier agreements between the committee and the IRS.