We wrote in 2007 about a series of TAMs in which the IRS had asserted that various income items of exempt credit unions were taxable as unrelated business taxable income—mostly income from non-members and members not directly related to deposits of and lending to members. “Cummings’ Corporate Tax Insights, Credit Union Insurance Ruled to Produce UBTI,” (3/27/2007). In 2008, the IRS ramped up the process by denying exempt status to several credit unions. LTRs 200829038, 200824025, 200809038. Now the IRS has issued a more detailed finding of UBTI. TAM 200931064.

The TAM finds that income from the following services to members produces UBTI:

  • financial management services
  • credit life and disability insurance

The TAM finds that income from the following services to nonmembers produces UBTI:

  • management fees from another credit union
  • ATM fees from nonmembers who are members of other credit unions that are in a cooperative relationship
  • income from an entity that provides the cooperative services to various credit unions’ members
  • interest income from the same related entity

Observations

All of this private guidance is in the form of TAMs and denial of exemptions. The credit unions are not politely asking if they can do something. That means that a fight is brewing on these issues.

The TAMs attempt to restrict the tax exempt operations of a credit union so strictly that they run the risk of being unable to perform their core mission. Providing non-banking services to depositors has a long and favored tradition in American law. For example, Louis D. Brandeis conceived the idea of savings bank life insurance for the purpose of providing affordable term life insurance to working people, who favored savings banks. The insurance was made affordable because it was sold across the counters of the savings banks, thus avoiding high agency costs.

The IRS has been down this road before, with very different results. In the 1990s, the IRS started to assert that the exempt bowl games that were “sponsored” by oil companies, etc., earned UBTI—a reasonable assertion. A firestorm erupted and the IRS was made to back down, eventually by a change in the statute. Bittker & Lokken, para. 103.3.4. We can thank these changes for the five minutes of “commercials” that now appear between 8:55 and 9:00 pm on PBS.

The credit unions are not likely to so easily receive congressional help, due to the different political landscapes: with the bowl game situation, all of business liked the statutory change adopted for charitable contributions (actually the contributors don’t care; they can deduct both charitable contributions and ad costs). Banks, however, don’t like credit unions.

Developing Case Law

The IRS may be trying to delay these cases from reaching decision in court. In one case, the court denied the IRS motion to dismiss, saying that the IRS had taken too long in considering the administrative refund claim. Bellco Credit Union v. U.S., 103 AFTR 2d 2009-622 (D. Colo. 2009). There was a jury trial in Wisconsin in May. Community First Credit Union v. U.S., 103 AFTR 2d 2009-2145 (ED Wis. 2009) (jury instruction memo). The credit union won, as stated in this statement appearing on its website:

The verdict was returned following four days of testimony and less than two hours of deliberation by the eight-person jury. The trial was held May 11-14, in the U.S. District Court for the Eastern District of Wisconsin with Judge William Griesbach presiding.

Opting for a jury trial looks like a smart way to go. The public likes credit unions.