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UBIT task force says Bellco decision shows the way
WASHINGTON (3/8/10)--The U.S. District Court’s summary judgment decision on one of the issues in the recently concluded Bellco CU case “represents ‘substantial authority’ under federal tax law” for the position that financial products and services that are sold by credit unions to their members are exempt from unrelated business income taxes, Foley & Lardner LLP has concluded. Judge Christine M. Arguello, who is presiding over the case, ruled last November that investment products that Bellco sold to its members, including stocks, bonds, mutual funds and annuities, were "substantially related" to Bellco's tax-exempt purposes, and therefore the income from those activities was, under the law, exempt from UBIT. The Foley & Lardner law firm, who represented Bellco in its case against the U.S. government, stated in its memorandum that credit unions would not be subject to civil tax penalties if they file UBIT tax returns “treating income from selling financial products and services to members as exempt from UBIT.” “Also, professional tax return preparers can prepare Form 990-T for a credit union treating income from selling financial products and services to members as exempt from UBIT without risking the separate civil tax penalty that can be imposed on preparers,” according to the release. However, the firm mentioned that it believes that the U.S. Internal Revenue Service “will still assert that financial product sales to members are unrelated business activities at credit unions” and “may well claim that additional tax is due if a credit union does not report income from such sales as unrelated business taxable income” on their income tax returns. Additionally, Bellco would not represent substantial authority if the summary judgment is successfully appealed. Since the judge has not yet rendered a decision on other issues in the case following a trial on those issues in December, an appeal is still possible. Also, the release noted that “the court in Bellco decided that income from selling financial products and services to non-members is subject to UBIT.” The memo was prepared at the request of the UBIT Steering Committee (consisting of representatives from the Credit Union National Association, the American Association of Credit Union Leagues, the National Association of State Credit Union Supervisors, and CUNA Mutual Group). The UBIT Steering Committee does not give tax advice, but said the Foley and Lardner memorandum contains general information that may be helpful to state-chartered credit unions' legal, tax, and accounting professionals in determining whether this decision constitutes “substantial authority” for their credit union to not pay, or to seek a refund of, UBIT paid on income from sales of brokerage or annuities products. Bellco last year challenged the IRS’s assertion that UBIT was due on three of its products, and sought $199,293 in tax refunds from the IRS.


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