DENVER (Filed 11:55 a.m. CT 4/5/10)--A Colorado judge has issued a ruling in favor of Bellco CU, the Greenwood Village, Colo.-based credit union challenging the government's unrelated business income tax (UBIT). In the opinion issued Friday, U.S. District Judge Christine M. Arguello ruled that:
* Bellco CU is not liable for UBIT on its income from its Direct Lending Program and its Indirect Lending Program for the tax year 2003 and the portion of tax year 2001 for which it has accurate income records; * It is not liable for UBIT on its royalties from Accidental Death and Dismemberment (AD&D) insurance; * Because Bellco lacks accurate income records, it is liable for UBIT tax on its Credit Insurance income for tax year 2000 and a portion of tax year 2001; and * It is liable for UBIT on its share of profits from the Credit Union Indirect Lending Association (CUILA) because the credit union did not meet the evidentiary burden required to prove that its share of income from CUILA "did not, intentionally or inadvertently, include other lines of CUILA's business," which were not tax-exempt.
Bellco had argued that income derived from sales of credit life and disability insurance, as well as royalties from AD&D insurance, should not be subject to UBIT because they are substantially related to the credit union's purpose of promoting thrift and making credit available at fair and reasonable prices. It has also argued that income from a third party vendor's sales of AD&D insurance to its members were "royalties" not subject to UBIT. The government 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. "In the banking and credit union context, the concept of thrift is tied to sound financial management...Credit insurance does just that...For a relatively marginal payment, the borrower buys peace of mind," Judge Arguello wrote in the summary judgment. "Giving members a convenient way to purchase insurance that protects them, their families, and their assets in the event of a catastrophic event certainly qualifies as a mechanism for careful management of the borrowers' money. "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." Also at issue was whether AD&D insurance provides royalty income, which is exempt from UBIT. To earn royalties, the credit union must play 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. In the judgment on indirect loans, the judge noted that the conclusions equally apply in the indirect loan context. The government argued that the program offered a "single premium" product that was more expensive than credit insurance and that auto dealerships are motivated by profit. "Neither of these facts is sufficient to convince the court that the Indirect Lending Program was not substantially related to Bellco's thrift function," she wrote. The other two findings centered on a lack of evidence presented as to calculations of the income from certain credit insurance products. In an earlier opinion issued in November 2009, Judge Arguello ruled that Bellco's income from sales of "financial services," such as securities and annuities, to its members via a third-party vendor was not subject to UBIT. Bellco filed the lawsuit last May with support of the UBIT Steering Committee, which includes the Credit Union National Association, CUNA Mutual, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors (News Now