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Credit Unions: not so tax-exempt?

November 16, 2009

Banks hate credit unions. Nobody likes competition, but tax-exempt competition can be truly annoying. That's why both banks and credit unions will be interested in a tax case playing out in a Colorado federal district court.

The IRS is trying to assess the Bellco Credit Union for "unrelated business income tax," or UBIT. This tax is a version of the corporate income tax. It is imposed on business activities of tax-exempt entities "unrelated" to their tax-exempt mission. It shelters taxable businesses from unfair competition from tax-exempt entities.

The credit union asked for "summary judgement" that a number of its activities were non-taxable as a matter of law. The court ruled for the credit union on a few items, but against it on one, and it set others aside for a full hearing.

The court ruled that financial services income -- such as brokerage fees and commissions -- were tax-exempt when earned from credit union members. Such income is subject to UBIT, according to the court, when earned from non-members, with no "de minimis" exception.

The court also held that UBIT applied to a 4% interest that the credit union owned in "Member Gateways," which was apparently a partnership owned by a group of credit unions.

The court will hold a full trial on whether income related to credit life and disability insurance products is subject to UBIT.

The court had to decide whether the decision will be up to a jury. In deciding that it is a question for a judge, rather then a jury, the court said:

As a threshold matter, technical tax determinations are not typically within the "common experience" of jurors -- if they were, thousands of accountants would be out of a job.

We can't have that, can we?

Bellco Credit Union; DC: Colo., No. 08-cv-01071-CMA-KMT. Tax Analysts subscribers can access the case here.

Tags: Credit Unions.UBIT.