Credit Unions vs the IRS

CU victory in government UBIT opinion

WASHINGTON (6/28/07)— In what the Credit Union National Association (CUNA) said is "an important victory for credit unions," the Internal Revenue Service (IRS) has released a new series of Technical Advice Memoranda (TAMs) that declare credit union interchange fees are not subject to unrelated business income tax (UBIT).

"This is a very bright spot in the UBIT picture," CUNA General Counsel Eric Richard said Wednesday. "We pushed very hard to protect interchange fees from UBIT, and this development allows us to focus on other products at stake."

The IRS opinion is of fundamental importance for two reasons, according Richard.



First, interchange fees are one of the largest sources of credit union income that were considered by the IRS for purposes of UBIT—representing more than $1 billion annually, according to CUNA estimates.


Second, it can be argued that the TAMs' treatment of interchange fee income is a clear signal from the IRS that the agency understands the income is derived from legitimate credit union activities evolving with the financial marketplace.

That second point, Richard said, could be significant in more upcoming opinions from the IRS on UBIT.

The IRS TAMs that address credit card interchange fees were part of the agency's most recent round of advice memoranda, which otherwise simply reiterated earlier UBIT advice.

The IRS already in 2007 has said that several products sold by unidentified state-chartered credit unions would be subject to UBIT. Among them, the sale of:



Credit life and disability insurance;
Accidental death and dismemberment (AD&D) insurance;
MEMBERS financial management services;
Car warranties;
Guaranteed auto protection (GAP) insurance; and
Dental and cancer insurance.

Federal credit unions are not subject to UBIT. The TAMs are directed to individual credit unions and do not set a precedent for all credit unions, but they could indicate how the IRS may approach another state-chartered credit union's products and services, according to Richard.

Richard reiterated that CUNA and the UBIT Steering Committee continue to work with credit unions affected by the IRS opinions and will pursue litigation as necessary. He said there are at least nine more TAMs in the pipeline.

The CUNA general counsel advises that because products, services and pricing structures are unique to individual credit unions, they should work closely with their accounting firms and attorneys in making any decisions related to UBIT for 2006 and 2007.

courtesy of cuna.org