SAN DIEGO — The legal challenge to the IRS's unrelated business income tax interpretations continues on as the UBIT Steering Committee works to educate credit unions on the matter.
CUNA Mutual Senior Vice President of Special Projects Larry Blanchard, who chairs the UBIT Steering Committee comprised of CUNA, AACUL and NASCUS, recently presented the California and Nevada Credit Union Leagues the committee's plan to protect credit unions from "unfair or unreasonable" UBIT interpretations. He told Credit Union Times that the committee also plans to keep the information flowing by traveling throughout the country, including upcoming trips to Arizona and Florida.
"We do believe the IRS is wrong, pure and simple, in these interpretations," Blanchard said. Despite efforts to negotiate with IRS, a legal challenge is a distinct possibility. "We've asked if credit unions are interested in challenging the TAMs [Technical Advice Memoranda] and a few of them have stepped forward."
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Over the last year, the IRS has issued TAMs in Alabama, Connecticut and Colorado, stating that credit unions should be paying UBIT–tax on business regularly conducted that is not part of an organization's tax-exempt mission–on insurance-related income such as credit insurance, AD&D, group life, health-related insurance and GAP insurance; securities and investment products; and nonmember ATM fees. The IRS has found that income derived from interchange fees from debit and credit cards, check printing, collateral protection insurance and ATM fees from members are not subject to UBIT.
If all goes according to plan and the IRS does not back down, Blanchard said the as-yet unnamed credit unions and the steering committee will begin filing lawsuits in the first or second quarter of 2008.
In the meantime, credit unions can prepare for potential UBIT audits according to CUNA Mutual Senior Vice President and Chief Legal Officer Faye Patzner, who also serves as co-chair of the UBIT Legal-Regulatory Subcommittee, by:
-Designating one senior officer as liaison to the auditor;
-Identifying and highlighting the notion that credit unions serve members on a mutual and nonprofit basis;
-Identifying empowering statutes and regulations to support the credit unions' exempt purpose;
-Identifying facts related to each product to support the relation to exempt purpose;
-Allocating direct and indirect costs to minimize net income; and
-Maintaining a united front.
Patzner told the California and Nevada credit union leaders they should recognize the difference between direct expenses, such as salaries and benefits, payroll taxes, licenses and registration, nonmember ATM terminal, and transaction fees, and indirect expenses when facilities and personnel are used for dual purposes.
"This is all part of an ongoing process, which we don't expect to be resolved until 2009 at the earliest," Blanchard said. "Credit unions should consult with their tax and legal advisors regarding how to proceed."
He noted that credit unions have been trying to get an interpretation out of the IRS on UBIT for a decade. "We've asked the IRS–and not gotten anything definitive–to look forward and not look back," Blanchard said, in applying UBIT.
He also pointed out that credit unions that do pay UBIT can apply for a refund if the lawsuits are successful.
Regarding new UBIT interpretations, Blanchard added, "They could come up with anything at any time but we aren't expecting anything."
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