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News Now

CU System
UBIT not just tax issue also dual charter issue--leagues
MADISON, Wis. (5/19/09)--Credit union leagues praised Community First CU's victory last week in a U.S. District Court in Wisconsin against the Internal Revenue Service's (IRS) interpretation of the unrelated business income tax (UBIT) on three insurance-related products offered by the state-chartered credit union. Some pointed out the broader implications of the case. "UBIT is not just a taxation issue, but also a dual chartering issue," says Paul Gentile, president/CEO of the New Jersey Credit Union League (The Weekly Exchange May 18). New Jersey was among the first leagues to support the efforts against the UBIT policy. "UBIT does not apply to federal chartered credit unions, so the anxiety among state charters becoming disadvantaged to their federal counterpart also added to UBIT's uniqueness," he said. "There was also concern among federal charters that the IRS would eventually look to broaden UBIT to federal charters," Gentile said. He noted the united front that the credit union movement provided on the issue, with the UBIT Steering Committee formed by the Credit Union National Association, CUNA Mutual Group, the National Association of State Credit Union Supervisors and the American Association of Credit Union Leagues. IRS's UBIT policy covers income that the IRS deems as "substantially unrelated to the purpose of a tax-exempt organization." State-chartered credit unions with more than $1,000 in UBIT must report it on the IRS's 990-T form. Historically, IRS hasn't clarified what does or doesn't trigger UBIT. But in 2007, IRS issued Technical Advice Memoranda that said six products could be considered as taxable under UBIT. They are: credit life and disability, accidental death and dismemberment, guaranteed asset protection (GAP, dental and cancer insurance, financial management services and auto warranties. Many credit unions had been offering these core products for years. The IRS intensified its efforts in auditing credit unions for UBIT, especially in Alabama, Connecticut and Colorado. Although a small number of states were involved, the impact of setting precedent in a few states has national implications, Gentile says. The court verdict in favor of the credit union on all three of its products is "a major victory for the credit union movement. It's unfortunate it came to litigation on products that seem so undeniably core to a credit union, but this well-deserved victory should help the credit union movement defend future UBIT challenges," Gentile said. Other leagues echoed the sentiment. "Credit unions have worked to get a resolution on the UBIT issue for nearly a decade, and this is a significant ruling," said Missouri Credit Union Association President/CEO Rosie Holub. "Most of Missouri's credit unions have these products, so it is very meaningful for credit unions in our state. This is great news." Mike Beall, president of the Maryland and District of Columbia Credit Union Association said, MDDCCUA has been a supporter of the UBIT efforts "and is a strong supporter of the dual chartering system. We are heartened and pleased with this initial court victory" (FOCUS Newsletter May 18). In the lawsuit filed in January 2008 with support from the UBIT Steering Committee, Community First CU, an Appleton, Wis.-based credit union sought $54,604--the amount it paid on taxes on credit life and credit disability insurance and GAP products. On Thursday, a jury ruled in favor of the credit union on all three products, saying they were substantially related to the credit union's mission. U.S. District Judge William Griesbach entered the judgment for the full amount plus costs (News Now May 15). The victory was deemed "a great outcome for state-chartered credit unions," by CUNA General Counsel Eric Richard. "We hope it will lead the IRS to reconsider its entire position on UBIT for credit unions," he said, adding, "but we are prepared for the next case in Denver." That case involves Bellco CU in Greenwood Village, Colo. The trial date hasn't been set yet.


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