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Preliminary jury rule in UBIT trial favorable to CU
MADISON, Wis. (5/11/09)--The trial in a Wisconsin credit union's challenge of an Internal Revenue Service's (IRS) interpretation of an unrelated business income tax (UBIT) begins today in a U.S. District Court in Madison, Wis. Friday the judge issued a ruling on jury instructions that is overall favorable for the credit union. Community First CU, based in Appleton, Wis., filed suit in January 2008 against the government after the IRS determined that certain guaranteed auto protection (GAP) and insurance products offered to members fall outside the credit union's main mission and are subject to UBIT. The credit union is seeking a refund of $54,000 in taxes paid on credit life and credit disability insurance and GAP products (News Now Jan. 16, 2008, and April 30). Friday U.S. District Court Judge William Griesbach issued a jury instruction memorandum with instructions in three areas--two of them favoring the credit union. The ruling rejected the government's assertion that, for UBIT purposes, federal law adds an additional "mutual purpose" element to the state law definition of a state-chartered credit union's purpose. Based on the government's pre-trial filings in the case, the government had planned to argue to the jury that this federal "mutual purpose" language required that every GAP or insurance product offered by the credit union had to be economically beneficial to every member virtually every time it was sold in order to be exempt from UBIT. Judge Griesbach said that the federal "mutual purpose" language only applied to whether the credit union qualified as a tax-exempt institution as a threshold matter and was not relevant to UBIT. The judge held that only the state law under which the credit union was chartered defined its "tax-exempt purpose." The issue of what constitutes the credit union's tax-exempt purpose is central to the case because a product must be "substantially related" to the credit union's tax-exempt purpose in order to be exempt from UBIT. Wisconsin law sets forth three purposes of a credit union: "to encourage thrift among its members, create a source of credit at a fair and reasonable cost, and provide an opportunity for its members to improve their economic and social conditions." The judge held that there was no basis to expand on the state's definition as the government attempted to do. "We won on that issue," Michael Edwards, counsel for special projects with the Credit Union National Association (CUNA), told News Now. "The judge is saying that the state's definition of a credit union's purpose is the controlling definition for UBIT purposes. This is consistent with Supreme Court precedent cited by the judge that the 'mutual purpose' language in I.R.C. section 501(c)(14) is only relevant to whether the state has grossly misused the term 'credit union,' such as if Wisconsin tried to make an entity tax-exempt that should not be, like a stock bank, just by calling it a 'credit union.'" The judge also rejected the government's request to have the jury treat credit life insurance and credit disability insurance as separate issues. He stated that "both simplicity and the interest in avoiding jury confusion would warrant a single question rather than two." CUNA's Edwards noted this is good because otherwise it would have been possible for the jury to conclude, illogically, that credit life should be exempt from UBIT but credit disability should be taxed, or vice versa. On the third issue, Judge Griesbach ruled against the credit union. "The point we lost on is about a Wisconsin regulation on the sale of credit insurance, which says it [the insurance] is 'directly related' to the business of the credit union. We wanted to bring that up in the trial, and the government didn't," Edwards said. "Overall, the rulings were pretty favorable, especially because it kept the additional 'mutuality' concept out of the picture," Edwards told News Now. CUNA General Counsel Eric Richard and Edwards will be attending the trial this week to monitor the case's progress. CUNA Vice President of Economics and Statistics Mike Schenk will be one of the expert witnesses testifying, via videotape, on behalf of the credit union. Check News Now throughout the week for updates.


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