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As if credit unions don’t have enough on their hands fighting off accelerated banker-led attacks at all levels that challenge the long standing credit union tax-exemption, along comes IRS’ UBIT bubbling to the surface affecting state-chartered credit unions in at least three states (so far). A reported 20 credit unions have been audited by the IRS in the past 12 months for the years 1999 and 2000. The purpose is to seek UBIT monies, in some cases, substantial amounts, like $600,000 from one CU. The new (at least to-some in-credit union land) acronym stands for Unrelated Business Income Tax and is pronounced “You-Bit.” As the name implies, the IRS wants to collect taxes on any income a not-for-profit organization takes in that is not “substantially related” to its original not-for-profit reason for being, or, “its exempt purpose.” Having spent a large part of my career as the CEO of a not-for-profit, tax-exempt, (501 C 6 in IRS parlance) association, UBIT is not foreign to me. Many years ago, my association at the time, the American Society of Association Executives (ASAE), waged many a battle against the IRS as it tried to put trade show and publication advertising income under the UBIT umbrella. IRS claimed providing a place for industry vendors to showcase their wares via paid ads and fee-based expos that could help associations, was not related to assisting the association achieve its n-f-p mission. By advancing a knowledgeable and united front, eventually the association industry won out. Today, credit union leadership must conduct a similar campaign to educate IRS, to request geographic consistency, and to convince IRS most of what CUs do is directly related to the purpose of a credit union. Note I said most. Undoubtedly there are some credit unions somewhere that may have strayed and are bringing in money that should in fact be taxed under UBIT. On the other hand, the majority of credit unions are probably in compliance. That being said, they still need to make a case to convince the dollar-seeking IRS officials to look elsewhere to fatten their coffers. How to do that needs to be a hot topic of discussion in credit union circles. Although state-chartered credit unions in only three states have been targeted by IRS so far, does anyone really think it is anything but a matter of time before IRS takes a close look at all state-chartered credit unions? Rather than pretend the IRS initiative doesn’t pose still another tax threat, credit unions need to call on their state and national associations to make every effort to communicate and coordinate. It would be foolhardy for each credit union, or even each state, to attempt to take on the powerful and all-knowing IRS by themselves. The last thing credit unions need to do is wait to be summoned by the IRS credit union by credit union and state by state. As credit union leaders have yet to learn in their dealings with banking industry lobbyists, the credit union industry needs to mount a good offense, not just play defense. It is alarming that some credit union folks have already indicated that their strategy is to say nothing, do nothing, and hope the IRS will go away. As ASAE members quickly learned the hard way, they won’t. One high-placed credit union spokesperson, who shall remain nameless to protect the guilty, even had the gall to tell (not suggest) Credit Union Times editors not to write about UBIT because that in and of itself would make the problem worse. A classic case of shooting the messenger. Although the IRS UBIT microscope is thus far only on state chartered credit unions in Alabama, Colorado, and Connecticut, it is not too late for credit unions in other states to learn as much as they can from their colleagues in those three states and everything else they can absorb about UBIT. Before the IRS comes calling. Then they need to look as closely as possible to see if their own credit union house is in order. If they conclude that they are doing some things that fall under UBIT provisions, they can decide to be ready to pay the piper. Or, they can dump those products and services if they deem them not worth the UBIT hassle and expense. In some ways, like defining a member business loan, the most difficult thing will be trying to determine for certain that something a credit union is doing or offering does or doesn’t come under UBIT. That’s where the need to coordinate and communicate comes into play. The next obvious question is, who or what credit union organization will lead the charge? Which one has the moxie, determination, and resources to walk credit unions through the UBIT maze? Can credit unions sell widgets, impose ATM surcharges, offer a plethora of insurance products, hold on-premise car sales, conduct raffles, sell logo wear, provide fee-based marketing and consulting services, sell checks and check holders, rent out space, etc. without any UBIT implications? Finding out what is covered would seem to be job one. Determining what activities to drop, transfer to a CUSO, modify, or defend also should have top priority. One thing that really seems strange in this latest tax challenge is that the IRS, a federal agency, can only go after state-chartered credit unions. FCUs are considered instrumentalities of the federal government and thus exempt from all federal taxes. The government can’t tax itself. Think ahead: if IRS levies a UBIT on state-charters, will it be very long before state-level taxing authorities see such a tax as an added source of income for rapidly depleting state budgets? Its called double taxation. Could UBIT become still another reason for state charters to convert to federal charters? Has the move already begun? Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail [email protected]

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Peter Westerman

Credit Union Times

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