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WASHINGTON – IRS audits of state-chartered credit unions for Unrelated Business Income Tax in Alabama, Colorado and Connecticut are coming to a halt -at least for now. IRS examiners in those states have ceased audits as they seek technical advice on UBIT in relation to credit unions from IRS headquarters in Washington, D.C. Larry Blanchard, CUNA Mutual’s SVP of Corporate and Legislative Affairs and chair of a UBIT steering committee made up of CUNA Mutual, CUNA, NASCUS and the American Association of Credit Union Leagues, said the committee provided CUs in those states with legal arguments to the UBIT audits that has likely spurred the IRS examiners going to D.C. for guidance. “The IRS examiners have requested technical advice from Washington. While that’s underway, there should be no tax bills coming, and no other credit unions examined while this is being assessed,” said Blanchard. Blanchard said this could be a long process. The IRS hasn’t exactly acted swiftly so far with UBIT. In 1997 credit unions tried to get a legal opinion from IRS on its Technical Advice Memorandum 9548001, issued in 1995, that states revenue from credit life and disability sales at credit unions is subject to UBIT. To date, the request has not been answered. While this latest development isn’t a win yet for credit unions, Blanchard believes it’s a step in the right direction. “This is a positive development. The IRS is saying `wait a minute, let’s take a closer look’,” said Blanchard. This work on the technical front by the steering committee is just one of many options for CUs to battle UBIT, but it is the correct first option said Blanchard. “If you look back at any case like this, before you go the legislative route or to the courts you exhaust your regulatory remedies first,” he said. UBIT of course has come screaming on to the credit union scene in recent years with over 30 audits being conducted of credit unions primarily in Alabama, Connecticut and Colorado, though there’s also been UBIT activity in Texas, Wisconsin and California (California is not an IRS audit state, it is included in the group as there is a state taxing authority looking at a state level-UBIT issue). That’s more audits than have been conducted at credit unions in the last 10 years combined. UBIT is only applicable to tax-exempt organizations. It is designed to tax non-profits for income they generate that is substantially unrelated to their primary purpose. Blanchard said that this renewed interest in UBIT by the IRS is not unique to credit unions. “The IRS reorganized a few years ago. When they came out of it, they told their examiners to go out and look at tax-exempt entities. Nobody has singled out credit unions. It’s been a broad look, including churches, schools and co-ops,” said Blanchard. Connecticut has been the hardest hit state so far with almost half of the state’s 50 state charters being audited for UBIT. Howard Pitken, Director of Financial Institutions for Connecticut, is strongly against UBIT, saying it’s a dual chartering issue that creates an uneven playing field between state and federal charters. Pitken was expectedly pleased with this latest development. “We’re very happy up here in Connecticut that the policymakers in Washington will have a chance to look at this issue. We’re hopeful that they see the income that is in question should be treated equally for state chartered and federally chartered credit unions,” said Pitken. CUNA General Counsel Eric Richard said this should force the IRS to start providing their reasoning for why or why not a credit union activity should fall under UBIT. But Richard believes credit unions have to be ready to attack this issue on many different fronts. “This places certain pressure on IRS headquarters to look at this issue and begin articulating how credit union income, in any way, is unrelated to the business of the credit union. However, whether or not the IRS will provide the guidance remains to be seen. In the meantime, we will continue to work with other credit union system players through all channels – in the courts, administrative action and through legislative means – to defend credit unions’ position that they are not subject to UBIT.” The UBIT steering committee has been working behind the scenes for sometime on this UBIT issue unbeknownst to many credit unions. Blanchard said any credit union hit with a UBIT audit should immediately contact their credit union league for guidance. Blanchard said auditing firms may not be the best first call for a credit union faced with a UBIT audit, as the credit union could ring up quite a bill just for UBIT guidance. “They would be smart to talk to their league first,” he said. Blanchard said this is the perfect opportunity for the IRS to discover what today’s credit unions look like. “I think it’s going to be an interesting discussion. I think we could get some traction here once they look at contemporary credit unions.” [email protected]

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