IRS Issues (Minorly) Revised Guidance to Agents on State-Chartered Credit Union UBIT

The IRS issued guidance to agents dealing with state chartered credit unions recognizing IRS losses on issues related to the treatment of certain items of income in TEGE Memo TEGE-04-0314-0005, later (very minorly) updated to TEGE-04-0315-0007.

In the cases of Bellco Credit Union v. United States, 735 F.Supp. 2d 1286 (2010), and Community First Credit Union v. United States, No. 08-cv-0057 (E.D. Wis. May 15, 2009), ECF No. 84 the IRS lost in its attempts to treat certain items as unrelated business income subject to the unrelated business income tax (UBIT).

Specifically both cases found that income from the sale of credit life insurance and credit disability insurance to members of a state chartered credit union was not subject to UBIT.  Additionally, the Community First case found that the sale of guaranteed auto protection insurance was not subject to UBIT, while the Bellco case held that the sale of accidental death and dismemberment insurance was excluded from UBI due to the royalty income exception.  The only “change” in the 2015 version of the memorandum (issued one year to the day after the original 2014 version) was to add a parenthetical explanation of the results of these cases.

The memo specifically informs agents to treat the following items as 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

      Interest from credit card loans

      Sale of collateral protection insurance

However, the agents are to treat income from the following items as subject to UBIT:

      Automobile warranties

      Dental insurance

      Cancer insurance

      Accidental death and dismemberment insurance

      Life insurance

      Health insurance

      ATM “per-transaction” fees from nonmembers

Finally, only income related to sales to members of the credit union for the following items should be excluded from UBIT:

      Credit life and credit disability insurance

      GAP auto insurance

The memo concludes that for all other insurance products, the income can only be excluded from the state-chartered credit union’s UBIT if there is a royalty agreement.  If the credit union receives a payment for its services in such cases, that payment for services would be UBIT.