WASHINGTON – The IRS' renewed interest in Unrelated Business Income Tax applying to state-chartered credit unions is one thing, but now corporate credit unions may have to fend off an attack on whether or not corporates should even be tax exempt. This issue is brewing in Connecticut. Constitution State Corporate Credit Union there along with all state-charters in Connecticut are being audited by the IRS for UBIT. However, an examiner from the local IRS office out of Brooklyn is questioning whether Constitution State Corporate should even be tax exempt. The local office has issued a Technical Advice Memorandum to IRS headquarters in Washington, D.C. to be ruled on. "Last November Constitution State Corporate got a letter from the local IRS office conducting audits in Connecticut that essentially said `we've come into your corporate, it's so unlike any credit unions we've been in. We do not know if Congress intended in the 1930s to grant you the tax exemption that Congress gave the rest of credit unions. In essence we're not sure you're a credit union,' "said Michael Canning, Executive Director of the Association of Corporate Credit Unions. Mike Kinne, CFO of Constitution State Corporate, said the auditor is pointing to the fact that when section 501(c)(14)(A) of the Internal Revenue Code was written giving state chartered credit unions their tax exempt status, there was no such thing as corporate credit unions. "Our response is that we feel we are covered because we're serving credit unions. We also feel if they're going to call into question the tax exemption in the IRS code, then it's going to take an act of Congress to change it," said Kinne. Many close to this story believe that this issue will ultimately be resolved favorably for corporates by IRS headquarters. CUNA General Counsel Eric Richard is one of those that believes the outcome will be good, and said he's already heard that IRS headquarters is looking quite skeptically at the issue. Richard said any IRS questioning of what is or isn't a credit union is a direct second guessing of any regulator anywhere in the country, state or federal, that issued the credit union charters. "Corporates are chartered as credit unions by the relevant authorities. That should settle it right there. They are operated on a non-profit basis as cooperatives," said Richard. According to Canning, the ACCU has been working on this specific case over the last few months. It has dedicated considerable resources, including hiring a lobbying firm and working with close to 30 lawyers. It's been an industry coordinated effort, including help from corporates, CUNA, NAFCU, U.S. Central and others. "Some of the attorneys from NAFCU and CUNA that have been around for many years were very, very helpful because they knew how Congress had recognized corporates." "This was an educational process we had to go through with the IRS to highlight how corporates for 40 years have been a part of the credit union movement. Any activity we were taking part in, was going for what natural person credit unions were doing for their members. We spent a lot of money and effort, but we think we've educated the IRS," said Canning. Canning said corporates around the country are aware of what's happening in Connecticut and wanted the ACCU to respond strongly. "If you go around talking about putting a regular corporation-like tax on a corporate, it's a serious blow to the business model, because instead of paying taxes, we forward a lot of money back to members. We couldn't just sit by and let this interpretation move forward." Francois Henriquez senior vice president and general counsel of U.S. Central Credit Union, said corporates can defend against the tax exempt status question in a number of ways. "There is clear case law that demonstrates a corporate credit union is a credit union and is entitled to the same legal benefits and burdens of natural person credit unions," said Henriquez. "And I'm sure that Congress is abundantly clear on what corporates are. In the Credit Union Membership Access Act Congress went so far as to carve corporates out of the provision related to member business loan restrictions, and also where corporate credit unions were exempted from the provisions of PCA. It's incorrect to say that Congress doesn't know what a corporate is," said Henriquez. This isn't the only issue the IRS has with Constitution. It also believes that much of what Constitution's CUSOs does should fall under UBIT. No argument from Constitution on that. "We do recognize that and have filed form 990T ( the UBIT form) for our subsidiary companies," said Kinee. However, Kinne believes nothing the corporate does on the corporate level is subject to UBIT. "We feel everything that we do there is for the benefit of the membership." The local IRS auditor who started the ball rolling, doesn't think so and is questioning just about anything where the corporate derives a fee from a credit union. As for the UBIT issue, Richard said it is moving along very slowly, but the dialogue with the IRS has been encouraging. Richard said it's important to note that there have been no new audits of credit unions for UBIT since October. [email protected]

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