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Judge rules investment products exempt from UBIT
DENVER (11/13/09)— Income from investment products, such as stocks, bonds, mutual funds and annuities, made available by a state-chartered credit union to its members is not subject to unrelated business income tax (UBIT), according to a summary judgment ruling by a U.S. District Judge yesterday. The ruling in U.S. District Court for the District of Colorado was issued in the case of Bellco CU Union v. United States. Bellco is based in Greenwood Village, Colo. Judge Christine M. Arguello ruled that investment products made available by Bellco to its members were "substantially related" to Bellco's tax-exempt purposes, and therefore the income from those activities was, under the law, exempt from UBIT. At the same time, Arguello ruled that income from investment products sold to nonmembers was not "substantially related" to Bellco's tax-exempt purposes, and therefore could be subject to tax. Bellco’s investment advisors had some nonmember clients. Arguello deferred to trial, scheduled to begin Dec. 7, the treatment of Bellco's income from credit life and disability insurance and accidental death and dismemberment (AD&D) insurance. The judge found that some of the facts concerning these products remained uncertain and needed to be clarified. Arguello will preside over a trial to determine those facts. The judge also said the trial should address the issue of whether sales of certain insurance products to people who are not members of Bellco, but do belong to other credit unions, should be exempt from UBIT because the products further Bellco's tax-exempt purposes. Bellco brought the lawsuit with the support of the UBIT Steering Committee, which includes the Credit Union National Association (CUNA), CUNA Mutual, the American Association of Credit Union Leagues, and the National Association of State Credit Union Supervisors. CUNA General Counsel Eric Richard said the steering committee is pleased with the ruling on financial services and looks forward to dealing with the remaining issues at trial. “The court made clear that financial products sold to members are fully consistent with the purpose of credit unions and should not be taxable,” Richard said. “Bellco argued, and the court agreed, these financial and insurance products help promote thrift on the part of CU members.” Richard said next month’s trial gives Bellco the opportunity to make its case as to why income derived from credit life and disability insurance, as well as royalties from AD&D, should not be subject to UBIT. Bellco has challenged an IRS assertion that UBIT is due on three of its products, and has asked the court to grant a refund of $199,293 in tax that was paid on income from AD&D insurance, credit life and disability insurance, and financial products and services in 2000, 2001 and 2003, plus statutory interest. Earlier this year, the U.S. District Court for the Eastern District of Wisconsin, following a jury trial, ruled that Community First CU of Appleton, Wis. was exempt from UBIT on income from credit life insurance, credit disability insurance, and GAP coverage, because those products were "substantially related" to the credit union's tax-exempt purposes as a state-chartered credit union.


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