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Bellcos win moves UBIT victory further says CUNA
DENVER and WASHINGTON (4/6/10)--A federal judge's ruling Friday--that Bellco CU of Greenwood Village, Colo., is not liable for unrelated business income tax (UBIT) in several significant areas--is a significant victory for credit unions, said Credit Union National Association (CUNA) General Counsel Eric Richard. The U.S District Court for the District of Colorado ruled Friday that income derived from credit life and disability insurance, sold directly or indirectly, as well as royalty income from accidental death and dismemberment (AD&D) insurance should not be subject to UBIT. The decision by U.S. District Judge Christine M. Arguello supplements the court’s ruling last November in the Bellco case that its commissions from vendor sales of financial products and services such as stocks and annuities to its members were “substantially related” to its tax-exempt purpose and so therefore not subject to UBIT. Last year in the U.S. District Court for the Eastern District of Wisconsin, a jury ruled Community First CU, Appleton, Wis., was exempt from UBIT on income from credit life insurance, credit disability insurance and GAP coverage. The Colorado decision “is a substantial victory in credit union court challenges to the Internal Revenue Service's (IRS) policy toward UBIT and its application to credit unions,” said Richard. Richard is a member of the UBIT Steering Committee, comprised of CUNA, CUNA Mutual, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors. The committee supported Bellco when the credit union filed the lawsuit last May. “This is the second time in a row the courts have rejected the IRS’s analysis of how UBIT should apply to credit unions, and the combined actions in this case extended that tax-exempt determination beyond credit life and disability insurance and GAP to also include financial products and services and royalty payments on AD&D insurance activities," said Richard. “At some point the IRS is going to have to recognize the inevitable and will have to change its policy based on the court rulings that have now been established,” he added. The government had argued that credit union insurance products are a poor value for members and do not promote thrift. Its case relied heavily on "low loss ratios" experienced by the insurance company that worked with Bellco. Judge Arguello ruled that credit insurance is directly related to the credit union's tax-exempt purpose because it promotes thrift. "In the banking and credit union context, the concept of thrift is tied to sound financial management," she said. "Credit insurance does just that. It permits a borrower to guard against certain difficult circumstances and to know that, if the unfortunate event of death or a serious disability occurs, the borrower's family and/or assets would be protected. For a relatively marginal payment, the borrower buys peace of mind," she added. "None of the government's arguments convince the court otherwise. The government's basic theory is that credit insurance is a 'bad deal' and thus cannot promote thrift," Arguello wrote, adding that the low loss ratio used "simply indicates that the insurance product was purchased by people who had not used it--yet." "In short, nothing about the low loss ratio, standing alone, convinces the court that credit insurance cannot be--and was not--substantially related to Bellco's thrift function." She also noted that "the evidence does not show that profit was the primary motivation in offering credit insurance." The AD&D insurance royalties issue centered on whether the credit union played a passive role in marketing and administering the program. "Much of Bellco's time was spent on activities intended to protect Bellco's goodwill with its members and its member privacy rather than to actively promote the AD&D program or otherwise perform administrative services for that program," Arguello wrote. Bellco's work "was focused on protecting its intangible assets and was sufficiently insubstantial, so as to result in the income appropriately being considered royalties." She noted that the majority of hours logged were at Bellco's call center, answering basic calls from members asking about the AD&D program. Citing insufficient recordkeeping rather than the principles at issue in the case, the court ruled that Bellco was liable for UBIT tax on its Credit Insurance income for tax year 2000 and a portion of tax year 2001, and on its share of profits from the Credit Union Indirect Lending Association. The ruling came after a trial in which court heard testimony of credit union officers and employees, credit union members and credit union league officials, said Michael M. Conway, attorney for Foley and Lardner, who argued the case on behalf of Bellco CU. It shows that this was a considered decision based upon evidence, not just legal interpretation, he said.


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