UBIT Update: IRS Offers Guidance for Tax-Exempt State-Chartered Credit Unions
Recently, the IRS issued an internal memo to its exempt organization examiners providing guidance on how income from certain types of activities of tax-exempt state-chartered credit unions should be treated for unrelated business income tax (UBIT) purposes. The memo indicates that the IRS will follow the decisions in two federal district court cases, Bellco Credit Union v. United States, 735 F. Supp. 2d 1286 (D. Colo. 2010), and Community First Credit Union v. United States, 2009 U.S. Dist. LEXIS 60283 (E.D. Wis. July 14, 2009).
State-chartered credit unions may qualify for tax-exempt status under section 501(c)(14)(A) of the Internal Revenue Code. Tax-exempt state-chartered credit unions are subject to UBIT. (Federal credit unions are tax-exempt under section 501(c)(1) as federal instrumentalities and are not subject to UBIT.)
Bellco and Community First held that income from the sale of credit life and credit disability insurance to members was not subject to UBIT because such sales were substantially related to the tax-exempt purpose of the credit union. Community First also reached the same conclusion with respect to the sale of guaranteed asset protection (GAP) insurance. In addition, Bellco held that income from the sale of accidental death and dismemberment (AD&D) insurance to members was excluded from UBI as royalty income.
The IRS memo states that examiners reviewing an original or amended Form 990-T or claim for refund by tax-exempt state-chartered credit unions should:
1. Treat income from the following income-producing activities as substantially related income not subject to UBIT:
a) Sale of checks/fees from a check printing company
b) Debit card program’s interchange fees
c) Credit card program’s interchange fees
d) Interest from credit card loans
e) Sale of collateral protection insurance
2. Treat income from the marketing of the following insurance products as well as certain ATM fees as subject to UBIT:
a) Automobile warranties
b) Dental insurance
c) Cancer insurance
d) Accidental death and dismemberment insurance
e) Life insurance
f) Health insurance
g) ATM “per-transaction” fees from nonmembers
3. Treat income from the following products if sold to members as not subject to UBIT:
a) Credit life and credit disability insurance
b) GAP auto insurance
If these two insurance products are sold to nonmembers, treat the income from these products as subject to UBIT.
4. Unless there is a royalty arrangement (rather than payments for a credit union’s services), treat all other insurance products including accidental death and dismemberment insurance as generally subject to UBIT.
What Does CohnReznick Think?
Credit unions may want to consider the Form 990 and 990-T reporting implications of any of their income-producing activities that are the same as or similar to the activities described in the IRS memo, as well as whether to file amended returns and/or refund claims. Also, any royalty arrangement should be structured to meet IRS guidelines.
For more information, please contact Phil Royalty, Director, at 916-930-5222, or Tom Lanning, Partner, at 646-834-4108.
To learn more about CohnReznick’s Not-for-Profit and Education Industry Practice, please visit our webpage.
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