Country / Language

UBIT Update: IRS Offers Guidance for Tax-Exempt State-Chartered Credit Unions


7/2/14

Synopsis
 
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).
 
Issue
 
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.

Contact

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.


The information contained herein (or in any attachment) is not intended to be used by any taxpayer for the purpose of avoiding any penalties that a taxing authority might impose on the taxpayer or for the promoting, marketing or recommending to another party any tax related matters.

The information in this transmission is privileged and confidential and intended only for the recipient listed above. If you are not the intended recipient, please advise the sender immediately by reply e-mail and delete this message and any attachments without retaining a copy. If you are not the intended recipient, you are hereby notified that any disclosure, copying or distribution of this message, or the taking of any action based upon it, is strictly prohibited.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More