GREEN BAY, Wis. -- The question of whether or not a state-chartered credit union must pay federal taxes on the part of its business operations that the IRS has deemed unrelated to its tax-exempt work moved a bit closer to resolution this week.

In a brief, pro forma answer to a challenge of a tax payment from the $947 million Community First Credit Union, headquartered in Appleton, Wis., the U.S. Justice Department outlined the facts on which it agreed with Community First and pointed out where it disagreed and would be prepared to argue the case.

In particular, the government said it "lacks information or knowledge sufficient to form a belief" about whether the $947 million, state-chartered CU is exempt from federal income taxes in all its operations. The government also denied that only two of the CU's products and services, in this case two types of insurance, generated enough income for taxable purposes. This appeared to leave open the possibility of a higher tax bill.

Lawyers familiar with the case indicated that they were not surprised by the government finding, and one pointed out that the government had chosen a particularly conservative approach.

"The government could, for example, have argued in a brief for dismissing the complaint, and it did not do that," said one lawyer who declined to speak for the record without authority from the client. "I would find that somewhat encouraging."

CUNA's General Counsel Eric Richard said the government's March 13 filing opened the door for the next phase of the case, which is for the court to establish a schedule for discovery and legal arguments and for each side to make arrangements to try to negotiate a settlement.

Richard explained that under federal court rules, parties had to at least try to come to an agreement to settle a case as part of the litigation going forward. The formal answer from the government lays out the ground work for those negotiations. CUNA supports the suit although it is not formally a party to it.

Discovery is one possibility that could now arise, Richard said, though he refrained from commenting on what direction the government's discovery effort might take. "One of the things that these tax cases are known for is discovery," Richard said.

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