UBIT Work Yields More Than Refunds – 19 Years Later
The Internal Revenue Service's recent publication on the unrelated business income tax represents far more than tax refunds en route to many credit unions; it shows how determination, patience and a shared vision can score big wins for credit unions, even when challenged by the federal government.
Because of how federal laws are written, state-chartered credit unions are subject to federal income tax on “unrelated” business activities. But other than taking deposits and making loans, what does the IRS consider to be “related” to credit unions’ purpose?
In 1995, emboldened by legal victories over not-for-profit groups’ income from insurance activities, the IRS decided state credit unions should be taxed on credit insurance income. The agency then began challenging a broad range of products and services, arguing that if a product or service was provided by taxable organizations, state credit unions should be similarly taxed. Such a decision was not only costly but, if left unchecked, posed a threat to the state charter and the dual chartering system.
Four organizations united to challenge IRS’ rulings and formed the UBIT Steering Committee: the AACUL, CUNA, CUNA Mutual Group and NASCUS. Their strategy: 1. Exhaust administrative procedures to achieve favorable rulings; 2. If significant issues remained, seek litigants and sue the government to overrule the IRS, and; 3. Weigh whether to seek legislative relief if steps one and two were unsuccessful. Recognizing that if ever executed, the third step could affect all credit unions, NAFCU and the Corporate Credit Union Network were asked to serve on its legislative committee.
Teams of in-house and retained professionals began working to educate the IRS on credit unions’ purpose. Credit unions, the committee argued, were created to meet members’ broad financial needs related to thrift and credit, and established as alternatives to for-profit financial services providers.
By 2007 the IRS had issued over two dozen Technical Advice Memoranda, affirming many state credit union activities as tax-exempt, such as ATM fees from members, interchange fees, and income from credit card loans, but falling especially short on financial services and insurance products. Moreover, TAMs were case specific rather than a broad policy statement.
The search began for credit unions willing to take the government to court, and two proved to be stellar candidates: Community First Credit Union (Appleton, Wis.), and Bellco Credit Union (Greenwood Village, Colo.). First to file suit was Community First. A jury trial in May 2009 unanimously decided the government was wrong and ordered a refund for taxes paid on insurance-related income, which was deemed closely related to credit unions’ purpose of promoting thrift.
Bellco followed with a bench trial where, in April 2010, the judge ordered refunds. The judge said commissions from the sale to members of financial products and services such as stocks, annuities and insurance are substantially related to its tax-exempt purpose and not subject to UBIT.
The Steering Committee pressed the IRS from 2010 into 2014 to recognize the broad applications of the courts’ ruling by issuing refunds to credit unions with claims similar to those settled in Wisconsin and Colorado, and to issue a broad policy statement that could be relied upon by credit unions and IRS examiners. Like TAMs, the courts’ decisions were helpful but case specific.
It took five years, but in March 2014, the IRS began the process of refunding millions of dollars to more than 200 state credit unions. The IRS also provided examiner guidance on products and services that were “substantially related income not subject to UBIT.”
The money saved by credit unions and their members through the court cases and negotiated agreements is not only for past years, but savings that will go on in the years ahead. The appeal of the state credit union charter is protected and even enhanced, and credit union competitors who have tried to have UBIT applied to FCUs must now see the greatly reduced value of such an endeavor.
The committee accomplished what it set out to do, and more. But the work isn't over. As products and services evolve, the IRS will assess whether they are thrift and credit related for members’ benefit. Through determination, patience and a shared vision, we will meet those demands.
Larry Blanchard is UBIT Steering Committee chairman and a retired CUNA Mutual Group executive who now consults. He can be reached at 608-665-7314 or email@example.com