Most Credit Union Products Not Subject to Unrelated Business Income Tax, IRS Memorandum Says

April 15, 2014

The Internal Revenue Service (IRS) recently issued a memorandum to its field staff that addresses the treatment of certain activities of state-chartered credit unions with respect to Unrelated Business Income Tax (UBIT).

The IRS memo is the result of almost 15 years of work on the issue. Prior to recent court cases, the IRS had held that while federal credit unions were not subject to UBIT, state-chartered credit unions were.

But In 2009, a jury in federal court ruled in favor of Community First Credit Union, finding that GAP products and credit life and credit disability insurance were substantially related to the tax-exempt purposes of credit unions and not subject to UBIT. In 2010, a federal court also ruled in favor of Bellco Credit Union, which had challenged UBIT on income from many of the same products through its direct and indirect lending programs.

According to the three-page “memorandum for all exempt organizations employees” — geared toward IRS examiners of exempt organizations, such as credit unions—revenue from the following income-producing activities are now deemed by IRS to be “substantially related income” not subject to UBIT:

  • Sale of checks/fees from a check printing company;
  • Debit card program interchange fees;
  • Credit card program interchange fees;
  • Interest from credit card loans; and
  • Sale of collateral protection insurance.

However, income from the marketing of other insurance products, as well as certain ATM fees, is still subject to UBIT:

  • Automobile warranties;
  • Dental insurance;
  • Cancer insurance;
  • Accidental death and dismemberment insurance;
  • Life insurance;
  • Health insurance; and
  • ATM “per-transaction” fees from nonmembers.

If credit life, credit disability insurance or GAP auto insurance is sold to members, it is not subject to UBIT. But the sale of those products to non-members would be treated as income subject to UBIT.

Finally, the memo states that unless there is a royalty arrangement, all other insurance products — including accidental death and dismemberment insurance — are to be treated as generally subject to UBIT.

The IRS indicated it will incorporate the memo into its Examination Manual to guide future audits of credit unions. Credit unions that want to pursue possible refunds of previously paid UBIT should consult with their tax professionals about the process.

The complete IRS memorandum is available here.

Question of the Week

Can a credit union run a promotion in which everyone who applies for a car loan is entered to win a prize?

Yes, provided that the credit union complies with the Washington Gambling Commission Act of 1973. A promotion like this is called a promotional contest of chance, which is actually not considered gambling. A promotional contest of chance is any contest, game, gaming scheme or gaming device in which the outcome depends on chance. Promotional contests of chance are authorized where the prize and chance are present, but there is no consideration. Consideration is defined as something of value — for instance, requiring your member to fund the loan would fall under that definition.

Promotional contests of chance must be conducted for the purpose of advertising or promoting services, goods, wares and merchandise of a business. It cannot be required that eligible persons pay any consideration or purchase anything to participate in the contest. However, if entry blanks or coupons were obtained by purchasing a newspaper or magazine, that is still not consideration.

Here, everyone who applies for a car loan is entered to win a prize. The outcome is dependent on chance and the participants are only required to apply for the loan, not actually take out a loan. Therefore, this would be a permissible promotion.

Oregon credit unions will need to follow requirements under the Oregon gaming codes.

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Legal Briefs

National Credit Union Administration (NCUA)

The NCUA issued a press release discussing the Central Liquidity Facility’s financial performance and discussing how membership is growing in the CLF.

NCUA’s General Counsel Michael McKenna testified before the House Financial Services Committee on the impact of financial services regulation. During his testimony, McKenna said a majority of the rules issued by the NCUA since 2013 provided regulatory relief or greater clarity for credit unions.

Consumer Financial Protection Bureau (CFPB)

The CFPB will be hosting a forum on the mortgage closing process in Washington, D.C., on Wednesday, April 23. Credit unions that are interested can also watch a live stream of the forum on the CFPB’s blog.

CFPB Director Richard Cordray delivered prepared remarks to the JumpStart Coalition on the importance of financial literacy.

Federal Financial Institutions Examination Council (FFIEC)

The FFIEC issued a press release outlining its expectations of financial institutions regarding the “Heartbleed” bug.

Federal Deposit Insurance Corporation (FDIC)

The FDIC issued a press release urging financial institutions to utilize the available resources to help mitigate cyber-related risks.

Internal Revenue Service (IRS)

The IRS is warning of a telephone scam that is targeting taxpayers nationwide. The scammers know some bits of information about the individuals they are calling, and are threatening unsuspecting taxpayers with jail time and driver’s license revocation. The scammers are even calling and pretending to be a local police officer or DMV representative after the initial threats are made. The IRS is reminding taxpayers that the agency will never ask for card information over the phone and generally communicates with taxpayers via written communication sent through the U.S. Mail. (The IRS doesn’t request personal information via email, either).

Federal Reserve Board (FRB)

The FRB released the names of the members of the 2014 Community Depository Institutions Advisory Council along, with the Record of Meeting of the April 4 meeting.

The FRB has released the minutes of the March 2014 Federal Open Market Committee meeting.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of April 11. The last update prior to this was April 10.

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

 

Posted in Compliance, Federal.