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IRS Accepts CU Verdicts in UBIT Cases
Thursday, April 10, 2014 7:00 AM

The Internal Revenue Service has accepted the rulings in two court cases brought by credit unions, clearing a wide range of credit union products and opening the door for credit unions to receive tax refunds. The IRS action may also provide authority for credit unions that have continued to pay UBIT on these products to cease doing so.

According to a March 24 “memorandum for all exempt organizations employees” (IRS examiners of exempt organizations, such as credit unions), the IRS deems revenue from the following income-producing activities as “substantially related income” not subject to UBIT:

  • Sale of checks/fees from a check printing company
  • Debit card program’s interchange fees
  • Credit card program’s interchange fees
  • ATM per-transaction fees from members
  • Interest from credit card loans
  • Sale of collateral protection insurance
  • Credit life and credit disability insurance (if sold to members)
  • GAP auto insurance (if sold to members)

Royalty income from the marketing of AD&D insurance to credit union members is also exempt.

IRS has also indicated it will incorporate the memo into its Examination Manual to guide future audits of credit unions. To read or download a copy of the memo, click here.

Larry Blanchard, chairman of a coalition of credit union organizations (the UBIT Steering Committee) that supported the litigation, said of the IRS memo, “[It] signals that credit union tax refunds for past UBIT payments should now be processed. It also bolsters credit union arguments that future payments to the IRS of UBIT on these same products may not be due."

As to the impact of the IRS guidance on future tax liabilities, credit unions are urged to consult with their tax advisers on whether the IRS pronouncement, combined with the previous court rulings, provides “substantial authority” to refrain from reporting the affected categories of income in the future. In the past, a law firm retained by the UBIT Steering Committee has provided a general opinion on the impact of the court cases on the “substantial authority” issue. To view this opinion, click here.

Blanchard said that although the committee’s work is essentially complete, they will press the IRS to be clear in the guidance it provides examiners on the full meaning and scope of the products and services decided by the two court cases.