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IRS issues a new UBIT opinion
WASHINGTON (8/5/09)—The Internal Revenue Service (IRS) has released a new Technical Advice Memorandum (TAM) stating that income derived by state-chartered credit unions from shared-branching arrangements, management services to other credit unions, certain CUSOs, and sales of financial management services and certain insurance products are subject to unrelated business income tax (UBIT). “We think this decision is clearly erroneous on multiple levels. Most basically, it fails to recognize the cooperative, interdependent nature of the credit union system as reflected in shared branching and management of one credit union by another,” said Eric Richard Tuesday. Richard is general counsel of the Credit Union National Association (CUNA). Richard also pointed out that the new TAM does not sufficiently analyze whether particular functions of credit union service organizations further the purposes of credit unions, which “should be the test of tax exemption.” This new UBIT TAM is the first such memorandum issued by the tax agency since it sent out a spate of such opinions in 2007. Two credit unions have filed suit against the IRS over its UBIT policies. 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 sought a $54,604 refund and a jury in May of this year found in the credit union’s favor. The latest TAM was drafted before the decision in the Community First case was issued. Bellco CU, Greenwood Village, Colo., also has filed a complaint against the IRS, seeking a refund of $199,000, based on UBIT taxes paid for 2000, 2001 and 2003. “The parts of this newest UBIT decision that deal with credit life and disability are at odds with the jury's decision in Community First, but this TAM was in the works long before that decision came down. It was officially issued to the credit union and the IRS agent in the applicable state in May, before the Community First trial,” CUNA’s Richard said. “Hence, even though the timing might look suspicious to outside observers, this TAM cannot be treated as a response to the Community First verdict,” he added. The CUNA UBIT Steering Committee will meet this week to discuss its next steps in UBIT strategy.


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