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WASHINGTON – It’s been very quiet on the Unrelated Business Income Tax front, but it turns out no news wasn’t good news. The IRS is expected to issue a technical advice memorandum (TAM) to its auditors in Alabama and Connecticut advising them that income from insurance sales and certain nonmember ATM fees fall under UBIT. For insurance, this would include credit life and credit disability, a popular credit union insurance product and one of CUNA Mutual’s staple offerings. UBIT only applies to state-chartered credit unions. Federal credit unions are considered federal instrumentalities and thus exempt. A few years ago, state-chartered credit unions in Connecticut, Colorado and Alabama were audited by the IRS for UBIT. In some cases, the IRS was calling many common credit union products, such as debit card and checks, into question. According to a memo sent to leagues and state-chartered credit unions from the UBIT Steering Committee, made up of CUNA, CUNA Mutual, NASCUS and the American Association of Credit Union Leagues, the IRS is “clearly wrong” on insurance and nonmember ATM sales, and it plans to challenge the IRS legally. In order to pursue this legally, said CUNA General Counsel Eric Richard, a credit union would first have to pay the taxes that they think they aren’t legally required to, and then wait a period of months before bringing suit. That credit union’s suit would thus become the precedent setting case, similar to AT&T Family FCU in the field of membership case. Richard said the UBIT Steering Committee would look for a certain type of credit union to bring the suit, though he did not want to reveal any legal strategy at this time. Credit unions may be surprised to learn of all the work that has been going on behind the scenes on UBIT. Members of the UBIT Steering Committee have met multiple times with IRS officials this Fall to try and explain credit unions’ position and in many ways educate the IRS about credit unions. Richard said it’s critical that the IRS not lump credit unions together with all other nonprofits or all other financial institutions. Credit unions’ uniqueness is part of its defense against UBIT. For example, Richard said the IRS seems very determined to tax insurance products such as credit life and credit disability. The problem may be that the IRS already has a position with other nonprofits that insurance is subject to UBIT. The IRS has case history on insurance products and trade associations and appears to be using that as a blanket approach for all nonprofits. So a tax-exempt labor union or the AARP for example would pay UBIT on insurance sales. “The purpose of the AARP’s tax-exemption is very different than credit unions’ tax-exemption. If you look at credit union history, it’s clear that these insurance products are integrated into credit unions’ business from day one. It’s nothing new for credit unions,” said Richard. He noted that he used the AARP as an example, nothing more. The IRS defines UBIT as income that is not substantially related to the purpose of the tax-exempt entity. Richard said if you position the credit union mission as that of providing a source of credit on a cooperative basis and promoting thrift, then credit life and credit disability would not fall under UBIT. Richard believes there is more to the IRS’ position on insurance. He said a number of people at the IRS consider credit life and credit disability somewhat of a consumer rip-off. “They have a negative impression from what they’ve seen in the banking industry and with payday lenders. Credit unions are getting swept up in the negative perception. The fact is CUNA Mutual has a very good story to tell with these insurances,” said Richard. CUNA Mutual paid out $450 million in credit life and credit disability claims in 2004. Those products are priced based on loan amounts. Larry Blanchard, senior vice president of corporate and legislative affairs for CUNA Mutual, strongly believes that the IRS is wrong on the insurance issue, but noted that if for some reason UBIT did apply to credit life and credit disability it would not prohibit credit unions from offering those products. He also doesn’t believe that the UBIT issue would sway state charters to convert to federal charters. The IRS’ position on nonmember ATM fees is much more muddled, so Richard did not want to speculate. But it appears as if the IRS will allow credit union members to use other credit unions’ ATMs without subjecting the credit union to UBIT. Of course, as Richard points out, this would be next to impossible to track who is a credit union member and who isn’t. The best example Richard could offer on what nonmember ATM fees would fall under UBIT would be if a credit union had an ATM franchise at an airport and generated significant fee income from nonmembers. But Richard doesn’t think the IRS is even clear yet on the nonmember ATM issue. There is some good news. The IRS does not regard income from credit and debit card interchange fees, sales of checks, and ATM fees from members, as falling under UBIT. “We’re disappointed with some things, but happy with others. The biggest dollar item here is interchange fees, and it looks like they’ve taken that off the table,” said Richard. The UBIT Steering committee memo states that the committee does not believe the IRS will try to get back UBIT taxes, thus the first year state-chartered CUs would have to start accounting for UBIT would be 2006. It’s important to note that the IRS has not issued the TAMs. Richard said the committee plans to exhaust all administrative avenues before pursuing litigation if they are issued. Credit unions that fall under UBIT will have to file IRS form 990-T for gross income over $1,000 from an unrelated business source. [email protected]

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