April 9, 2014 – For immediate release

Breakthrough with IRS Over Credit Union UBIT Payments

Finally bowing to the results of two federal court cases brought by credit unions, the Internal Revenue Service has issued a memorandum that clears nearly all credit union products at stake in the litigation from being subject to unrelated business income tax (UBIT). The IRS action opens the door for credit unions to receive refunds of past payments.

“This is clearly a breakthrough with the agency,” said Larry Blanchard, chairman of a coalition of credit union organizations that has supported the litigation. “We have achieved what we set out to do, and more. The IRS memo signals that credit union tax refunds for past UBIT payments should now be processed. It also bolsters credit union arguments that future payments to the IRS of UBIT on these same products may not be due. Credit unions should talk this over with their tax advisers. In any event, this is a welcome and well-deserved development for credit unions.”

He added that the IRS memo reflects the agency’s appreciation for rulings of the courts, namely that the credit union mission to serve members extends well beyond loans and savings accounts.

The coalition—the UBIT Steering Committee—includes Blanchard, a consultant with CUNA Mutual Group; Eric Richard, executive vice president and general counsel, Credit Union National Association; Susan Newton, executive director, American Association of Credit Union Leagues, and; Mary Martha Fortney, president and CEO, National Association of State Credit Union Supervisors. Faye Patzner, EVP and chief administrative officer, CUNA Mutual Group, chaired and spearheaded the legal efforts.

According to a three-page, March 24 “memorandum for all exempt organizations employees” (that is, IRS examiners of exempt organizations, such as credit unions), revenue from the following income-producing activities are deemed by IRS “substantially related income” not subject to UBIT:

  • Sale of checks/fees from a check printing company
  • Debit card program’s interchange fees
  • Credit card program’s interchange fees
  • ATM per-transaction fees from members
  • Interest from credit card loans
  • Sale of collateral protection insurance
  • Credit life and credit disability insurance
  • GAP auto insurance

Income from the last two items are not subject to UBIT if the products are sold to members. Royalty income from the marketing of AD&D insurance to credit union members is also exempt.

Click here for a copy of the memo; IRS has also indicated it will incorporate the memo into its Examination Manual to guide future audits of credit unions.

“After 15 years of work—and millions of dollars in litigation expenses—it is ironic that a breakthrough in a struggle of this scope comes down to a three-page memo,” Blanchard said. “But the effort has been entirely worth the time and money, particularly for those credit unions who have filed their returns and made payments in the past. Our thanks in particular to Community First and Bellco Credit Unions for their leadership on this issue.”

In 2009, a jury in federal court ruled in favor of Community First CU of Appleton, Wis., regarding tax related to three insurance products (credit life and credit disability insurance and guaranteed asset protection (GAP) products).  The jury found that these products were substantially related to the tax-exempt purposes of credit unions.

In 2010, a federal court in Colorado ruled in favor of Bellco CU, a Greenwood Village, Colo.-based credit union that challenged UBIT on income from many of the same products through its Direct Lending Program and its Indirect Lending Program for the tax year 2003 and the portion of tax year 2001 for which it has accurate income records.

As to the impact of the IRS guidance on future tax liabilities, neither the UBIT Steering Committee nor any of its members can provide tax advice to credit unions. The committee urges credit unions to consult with their tax advisers on whether the IRS pronouncement, combined with the previous court rulings, provides “substantial authority” to refrain from reporting the affected categories of income in the future. In the past, a law firm retained by the Steering Committee has provided a general opinion on the impact of the court cases on the “substantial authority” issue. To view this opinion, click here.

Blanchard said that although the committee’s work is essentially complete, the committee will press IRS to be clear in the guidance that it provides examiners on the full meaning and scope of the products and services decided by the two court cases, and earlier agreements between the committee and IRS. The committee believes that clarity is essential so that credit unions will be able to offer products and services to their members in the future with a significantly diminished threat of having to pay an unrelated business income tax.”

Information Contact:
Patrick Keefe, CUNA Communications,, or (202) 508-6765

The NASCUS mission is to enhance state credit union supervision and advocate a safe and sound state credit union system.