Community First paid the $54,604 and immediately requested a refund from the IRS on the grounds that the provision of these sorts of insurance were, in fact, part of its business as defined under Wisconsin law and, as such, were exempt from Federal taxes under the IRS code. After six months, the IRS still had not made the refund, thus the CU brought suit.

CUNA General Counsel Eric Richard explained the CU's approach of paying the tax and then immediately filing a request for a refund is a standard approach to similar arguments with the tax agency. He also explained that the CU and its supporters had carefully chosen among several different venues to bring the case and that the CU has requested a jury trial. "A jury trial is a mechanism for bringing some common sense from the ordinary citizenry into the courtroom," Richard said.

Another idiosyncrasy about litigation with the IRS, Richard explained, is the singularity of its cases. This case will be between Community First and the IRS. While the CU has the broad support of many industry groups and the attention of many more, Richard maintained that others will not be able to become plaintiffs or file briefs, either in support or opposition to the agency's position. "There is no such thing as a class action suit against the IRS," he said.

Larry Blanchard, senior vice president with CUNA Mutual, which supplies some of the products in question, reminded reporters that the case had only come about after years of conversation and consultations with the IRS–conversations that resulted in the tax agency actually changing positions on different aspects of what activities would be covered by UBIT. Blanchard recalled that credit unions had won a victory in convincing the agency earlier this year that card interchange income–now an important part of credit union non-interest income–should not be subject to UBIT.

This would appear to offer hope for resolution to the question without litigation, but the agency has shown a tendency to change its mind on these different decisions. At one time, for example, the IRS had ruled that insurance of the sorts subject to the suit were not subject to the tax. A court decision in the CU's favor could provide a more lasting resolution of the matter.

"IRS's ability to change its mind only exists to the extent that it is operating under an ambiguous law," Richard said. "By clarifying the law, the court will prevent future changes of course."

Even though Community First listed five products or services that could have been subject to UBIT in its filing, only the insurance products had made enough to merit the tax, according to its filing. The CU reported making $189,960 on its offering of credit life and credit disability insurance and $18, 456 on its offering of guaranteed auto protection insurance.

Despite the litigation's singularity, the case has drawn widespread attention because it touches on several aspects of credit union business, including parity between state and federal charters. Federally chartered credit unions, as instrumentalities of the federal government, are completely exempt from federal taxes while UBIT would apply only to state-chartered credit unions, creating a potential disadvantage for that charter choice.

"State regulators and state legislators have long-recognized that credit unions must evolve their products and services to meet the needs of their members," said NASCUS President/CEO Mary Martha Fortney. "The IRS must understand that credit unions offer certain products to their members in an effort to promote thrift and savings, as a part of the credit union's purpose."

"NASCUS and other members of the UBIT Steering Committee disagree with the IRS' interpretation of what's related to a credit union's business and support this lawsuit and other continued efforts to challenge UBIT."

Meanwhile, even though it may not be able to file a brief in the case, the American Bankers Association couldn't resist weighing in to decry the suit.

"Traditional credit unions earn their tax-exempt status by meeting the purposes set forth in their charter–to serve the needs of low-to-moderate income people by promoting thrift and providing low-cost credit to members," ABA President/CEO Ed Yingling said in a prepared statement. "When credit unions offer products to non-members or offer services that are beyond their chartered purpose, they shouldn't be given a tax break on those services."

"Rather than trying to skirt the law, non-traditional credit unions should consider changing their charter and become good corporate citizens."

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