Friday, May 15, 2009

Community First CU wins UBIT case

GREEN BAY, Wis. (5/15/09)--Community First CU has won its challenge against the federal government over the Internal Revenue Service's (IRS) interpretation of the unrelated-business income tax (UBIT) as it relates to three insurance products.

Eight jurors delivered the verdict at 5:45 p.m. CT Thursday in favor of the credit union on all three products, according to Michael Edwards, counsel for special projects with the Credit Union National Association (CUNA), who was present in the courtroom. "The jury deliberated less than two hours, which is pretty short," Edwards told News Now.

U.S. District Judge William Griesbach entered the judgment in favor of the credit union for $54,604, the full amount the credit union was seeking, plus costs, which could go into a five-figure amount. The amount represents taxes paid on credit life and credit disability insurance and guaranteed asset protection (GAP) products.

"This is a great outcome for state-chartered credit unions," said CUNA General Counsel Eric Richard, who attended the trial earlier this week. "We hope it will lead the IRS to reconsider its entire position on UBIT for credit unions, but we are prepared for the next case in Denver."

The verdict means that the jury was not persuaded by the government's two key expert witnesses--Birny Birnbaum, a self-employed consulting economist, and Gordon Karels, chairman of the finance department at the University of Nebraska-Lincoln, said Edwards.

Birnbaum and Karels are the only government witnesses in a similar UBIT case involving insurance products filed by Bellco CU of Greenwood, Colo., last May. That complaint seeks a refund of $199,000, based on UBIT taxes paid for 2000, 2001 and 2003.

Community First's trial began Monday in Green Bay, Wis. The Appleton, Wis.-based credit union filed suit against the government in 2008 after the IRS determined that certain GAP and insurance products offered to members fall outside the credit union's main mission and are subject to UBIT.

Earlier in the day Thursday, Judge Griesbach had reversed an earlier preliminary ruling issued last week, in which he said credit disability and credit life insurance could be treated as a single issue under "credit insurance related" issues. Instead, he ruled Thursday that the two products would be treated as separate issues, said Edwards. The judge cited two reasons for the split: 1) factual differences between the two products and 2) different premiums on the products as the y relate to rate of loss for the insurance company.

In its closing argument, the credit union argued that all the insurance products are related to all of the credit union's purposes under Wisconsin law; that the insurance and GAP products are a source of credit with fair and reasonable rates and are directly connected to the loans made; and that the credit union educated members about the products to improve their financial conditions.

In its closing argument, the government argued that the products were "a rip-off" because they were "overpriced" relative to theoretical alternatives (that do not exist on the market). The government also argued that "mystery dollars" were going to CUNA Mutual Insurance Society (CUMIS), the insurer and that several witnesses had ties to CUMIS and were therefore "biased."

Community First filed the suit in January 2008 with the support of the Credit Union National Association, the American Association of Credit Union Leagues, CUNA Mutual Group and the National Association of State Credit Union Supervisors.

The Wisconsin Credit Union League also supported the effort and league President/CEO Brett Thompson testified on behalf of the credit union earlier in the week.

courtesy of

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