IRS' Unrelated Business Income Tax Poses Serious Potential Threat to State Charters; CU Groups Join Forces

WEST PALM BEACH, Fla. – In an industry already awash in acronyms, a new one emerged this year that most credit unions wish would just go away. The IRS’ Unrelated Business Income Tax, or UBIT as it’s referred to, caused quite a scare in 2003 for state charters in three states and has all state charters wary of its potential tax threat. UBIT is designed to tax non-profits for income they generate that is substantially unrelated to their primary purpose. UBIT has been around for years, but never before has there been such a cluster of IRS UBIT audits of credit unions. In Connecticut nearly all of the 44 state charters have been audited. There have been another eight in Colorado and six in Alabama. CUNA Mutual, CUNA, NASCUS and the American Association of Credit Union Leagues have formed a steering committee to coordinate the UBIT fight. The most problematic aspect of UBIT so far is what constitutes UBIT? The IRS has not laid out which credit union products or services it believes should be subject to UBIT, and what’s more nerve-wracking for credit unions is some of the mainstream products the IRS is looking at. For instance it is questioning credit life and disability, sales of checks, collateral protection and GAP insurance, AD&D and group life insurance, non-member ATM fees, interchange fees, and other core CU products. The IRS has also been extremely deliberate (some might say low) in responding to UBIT inquiries. For example, an IRS Technical Memorandum issued back in 1995 essentially states that credit life and disability insurance is taxable under UBIT. CUNA Mutual and NASCUS responded to that letter stating why they believe it isn’t taxable, and the IRS has yet to provide further advice on credit life and disability. The UBIT issue is one of the top stories of the year because of its potential. The IRS could rule that a number of core CU products fall under UBIT and thus state charters will face a new tax burden. UBIT is also a dual chartering issue, because while it affects state charters, it does not affect FCUs. Bad news on UBIT could lead to state charters converting to FCUs in droves. UBIT could be a PR nightmare for the industry as it gives the bankers an opportunity to once again bring up their argument that CUs are like banks and should be paying the same taxes banks pay. The UBIT steering committee has identified three ways to fight the UBIT issue: administratively, legally or legislatively. However all have their down sides. The administrative fight will undoubtedly be long and drawn out based on IRS’ record so far in this matter. The legal fight requires finding an ideal CU plaintiff and CUs could lose in the end. The legislative fight could put CUs under Congress’ microscope and give the banks more ammo to attack credit unions. So far the committee is pursuing the administrative angle, yet it is gearing up on all fronts. [email protected]