While it is still fuzzy on how CUSOs figure in unrelated business income tax, the IRS has repeatedly turned to a 1986 Alabama Central Credit Union case involving group life insurance to make its case.
At issue is a credit union referred to as "T, a state-chartered credit union," in a May 5 IRS technical advice memorandum, which had a contract through its CUSO with a smaller, newly-created CU to manage its operational systems. As a result, the CUSO derived fee income and interest income.
In its memo, the IRS referred to a 1986 insurance case involving the Alabama credit union several times and whether commissions were subject to income tax. A court ruled they were because the league "derived no benefit from the policies other than commission" among other factors. The agency concluded that the sale of T's financial management services as well as the sale of credit life and disability insurance, and interest income was subject to UBIT.
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For Eric Richard, general counsel at CUNA, it is still not clear if CUSOs would be required to pay UBIT. He said he will meet with the trade group's UBIT steering committee on Aug. 7.
"The [IRS] analysis doesn't focus on the fact that it was a CUSO. There is a focus on members of the smaller credit union not being members of the big credit union. Some people are saying that it raises issues about income from CUSOs. It does raise some ambiguity."
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