WASHINGTON–The IRS continued issuing Technical Advice Memoranda defining what activities it considered unrelated to the business of a credit union and therefore subject to unrelated business income tax.
In April, the IRS issued eight TAMs and buried in them something new to raise the ire of credit unions; one of these TAMs placed non-member ATM fees under the UBIT tax on business regularly conducted that is not part of an organization's tax-exempt mission.
Over the last year, the IRS has issued TAMs in Alabama, Connecticut and Colorado, declaring sale of accidental death and dismemberment insurance, group life, dental, health and cancer insurance, car buying service and sale of car warranties, guaranteed auto protection insurance, credit disability insurance, and MEMBERS financial management services subject to UBIT.
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"The facts do not show how fees charged to nonmember ATM users contribute directly and importantly to accomplishing [the credit union's] exempt purposes," The April TAM stated. "The nonmember benefits in that he or she can access an ATM. While there is also a benefit to the individual members by allowing them to use the ATMs of other financial institutions, the facts do not show how the nonmember ATM fees contribute importantly and directly to accomplishing [the credit union's] exempt purposes, other than through the production of income. Availability of ATMs by nonmember does not encourage savings or assist [the credit union] in offering low cost credit."
While the development was "theoretically significant," CUNA General Counsel and Executive Vice President Eric Richard said, CUNA does not believe many credit unions actually generate "significant net income" from non-member ATM fees after allocating for expenses.
On a positive note for credit unions, the IRS also publicly released 12 TAMs in June reiterating its position on those activities subject to UBIT but then exempted interchange fees. "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 "Credit unions originally made unsecured personal loans to members.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."
Richard explained that the interchange fees were "probably the biggest dollar item," with credit unions earning about $1 billion a year on them.
To deal with the IRS' rulings on UBIT, some key players in the credit union community formed the UBIT Steering Committee, comprised of CUNA, NASCUS, CUNA Mutual and the American Association of Credit Union Leagues. The committee is plotting legal challenges for the first quarter of 2008, according to Chairman Larry Blanchard, CUNA Mutual senior vice president of special projects. A few as-yet credit unions have stepped forward to volunteer as plaintiffs, he said.
The steering committee lobbied hard for the ruling on interchange fees and were successful. Richard explained that a large part of their discussions with the IRS in lobbying for the interchange fee ruling was "Can credit unions evolve or not?" The IRS finding on interchange fees seems to indicate 'yes,' which should help the credit union suit.
The steering committee believes the IRS is just plain wrong in its UBIT decisions. 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.
The UBIT Steering Committee is continuing to work to educate credit unions on the issue, including a recent seminar at the California and Nevada Credit Union Leagues. Additional, visits around the country are planned.
It will be at least another year before anything is resolved, according to Blanchard, so in the meantime, credit unions can prepare for possible audits by:
-Designating one senior officer as liaison to the auditor
-Identifying and highlighting the notion that credit unions serve members on a mutual and non-profit basis
-Identifying empowering statutes and regulations to support 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.
Additionally, the UBIT Steering Committee has held national teleconferences and Webinars on UBIT and sent numerous memos to state-chartered credit unions, leagues and state regulators.
NASCUS President/CEO Mary Martha Fortney vowed that her organization would continue to devote attention to the crucial issue into the coming year. "From NASCUS' perspective, the IRS TAMs issued in 2007 were misguided, and certainly NASCUS, in partnership with other members of the UBIT Steering Committee, will continue to educate state credit unions on UBIT while taking steps to correct the current IRS interpretation of what is related to financial services for modern, viable institutions in the 21st century," she said.
Blanchard pointed out that that credit unions have been trying to get an interpretation from the IRS on UBIT for a decade. In applying these UBIT decisions, he said that the steering committee has asked that they be applied to future filings and not retroactively. He added that credit unions that do pay UBIT can apply for a refund if the lawsuits are successful.
New interpretations on UBIT could come up at anytime, but the committee is not aware of anything in the pipeline at this point.
CUNA's Richard said that he was disappointed that the IRS has yet to rule on credit union versus shared network, non-member ATM fees. "Fees generated by those kinds of facilities would likely be from members of other credit unions, and it is not clear that the IRS would treat those fees the same way as fees generated from random customers on the street," he said. However, the good news there is that most credit unions–if not all–record net losses in this area, which could help offset some of the other UBIT items.
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