Unrelated Business Income Tax


Unrelated Business Income Tax (UBIT)

After the conclusion in 2014 of two federal court cases brought by state-chartered credit unions, the IRS issued a memorandum defining a number of credit union products as “substantially related income”, clarifying certain income-producing activities the IRS previously considered subject to Unrelated Business Income Tax (UBIT), as not subject to UBIT. The memo, which is being incorporated into the IRS examination manual geared toward IRS examiners of exempt organizations, reflects the following as “substantially related income” that is not subject to UBIT:

  • Sale of checks/fees from a check-printing company;
  • Debit and credit card program’s interchange fees;
  • Interest from credit card loans;
  • Sale of collateral protection insurance;
  • Credit life and disability insurance (if sold to members);
  • GAP auto insurance (if sold to members).

Royalty income from marketing accidental death and dismemberment insurance to members is also listed in the memo as exempt. The memo further clarifies what specific income areas will continue to be considered subject to UBIT.

A coalition of credit union groups that has supported the litigation known as the UBIT Steering Committee, comprised of the Credit Union National Association (CUNA), CUNA Mutual Group, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors have been actively involved in this issue for approximately 15 years.

By way of additional background, the UBIT Steering Committee through outside tax counsel corresponded with the Acting Commissioner of the IRS regarding the ongoing issue of state-chartered credit unions and unrelated business income tax (UBIT) in the fall of 2013. In the letter, the IRS was reminded of the repeated requests for assistance from the Exempt Organizations Division over a period of more than 10 years to resolve serious issues surrounding UBIT. Here is a link to the Committee’s UBIT Letter to IRS (pdf).

The 2014 decision was celebrated as one that will relieve credit unions from the threat of having to pay UBIT taxes on certain products and services being offered to members.  Further, credit unions that have paid UBIT taxes on such products in the past and subsequently filed a refund request, may now have such refunds processed.

See the IRS Memorandum on UBIT entitled “Applicability of Unrelated Business Income (UBIT) to State Chartered Credit Unions Described in IRC §501(c)(14)(A)." 

Credit unions should consult with their tax advisers regarding application for any refund, and for reporting such affected categories in the future. Note that the Minnesota Department of Revenue imposes its own UBIT regulations.

 


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