WASHINGTON — The IRS has publicly released rulings recently in Technical Advice Memoranda stating that credit card interchange fees are not subject to unrelated business income tax.
The IRS released 12 Technical Advice Memoranda June 22, which reiterated some of the IRS' stands on credit union activities subject to UBIT, but also cleared credit card program interchange fees from coverage. "Making interest-bearing loans to members is a traditional activity of exempt credit unions," one of the TAMs read. "Credit unions originally made unsecured personal loans to members. Because of changes in the financial marketplace and the expanded needs of financial institutions customers, today all the types of loans made by [the unnamed credit union]–including personal loans to members; first mortgage loans and second-mortgage or home equity loans, secured by residential real estate owned by the members; small business loans; auto loans, secured by the automobile owned by the member whose purchase is financed by the loan; and credit card loans–are recognized as substantially related to the exempt purposes and functions of [the credit union]."
The TAM continued, "Therefore, any net income, after deduction of related expenses arising from the card program, specifically including but not limited to the interchange fees generated by merchant purchases, is not subject to unrelated business income tax."
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"They were as expected and we were very glad we got the ruling we did," CUNA General Counsel Eric Richard commented. Interchange fees were "probably the biggest dollar item," he explained, with credit unions earning about $1 billion a year on them.
Richard added that he was disappointed that the IRS has yet to rule on credit union versus shared network nonmember ATM fees. However, the good news about that is most credit unions, if not all, he said record net losses in this area, which could help offset some of the other UBIT items.
In previous TAMs, the IRS has determined that accidental death and dismemberment insurance; group life, dental, health and cancer insurance; car buying service and car warranties; guaranteed auto protection insurance; credit life and disability insurance; MEMBERS financial management services; and nonmember ATM fee income are all subject to UBIT. TAMs so far have been issued in Connecticut, Alabama, and Colorado. "That's why it's so important for us to go to court," CUNA Mutual Group Senior Vice President Larry Blanchard stated, so the phenomenon does not spread.
The UBIT Steering Committee–comprised of CUNA, NASCUS, CUNA Mutual and the American Association of Credit Union Leagues–has been planning a lawsuit against the IRS. The committee has found one credit union, as yet unnamed, that is willing to serve as a plaintiff but they are looking for more volunteer plaintiffs. At the earliest, Richard said, the suit will be filed late this year.
The committee lobbied hard on this decision regarding interchange fees and got results. Richard referred to this decision as "probably the brightest spot in the picture," and it allows the steering committee to put its resources into other areas.
"We're thrilled with that," Blanchard said of the latest ruling. However, he added, "they look at insurance differently."
According to Richard, a large part of their discussions with the IRS in lobbying for the interchange fee ruling was "Can credit unions evolve or not?" The latest IRS finding indicates yes, which he said should help the credit union suit.
Blanchard asserted, "Just because they have ruled against insurance doesn't mean they're right." He said the steering committee believes the IRS is factually wrong.
Richard pointed out that CUNA Mutual Group, which offers a variety of insurance products to credit unions, was created back in the 1930s when CUNA was established so credit unions have a long history of providing insurance products.
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