For more information:
Maripat Blankenheim 608/232-6539 maripat.blankenheim@cunamutual.com
 
 
Nov. 14, 2007
 
CUNA Mutual Execs Clarify UBIT Interpretations
Steering Committee Leader Offers Advice To California and Nevada Credit Unions
 
SAN DIEGO – Credit unions should prepare well for potential audits aimed at identifying UBIT-related expenses, said two CUNA Mutual Group executives to members of the California-Nevada Credit Union League at their annual meeting. Speaking to the group were Larry Blanchard, senior vice president of special projects, and Faye Patzner, senior vice president and chief legal officer.
 
UBIT, an acronym for unrelated business income tax, is tax based on net income derived from any unrelated trade or business. According to Blanchard, this is activity not substantially related to an organization’s exempt purpose. The trade or business in question must be one that is routinely carried on before UBIT applies.
 
Blanchard, who chairs the UBIT Steering Committee that includes representatives from CUNA, AACUL and NASCUS, presented the group with a UBIT roadmap explaining the process advocates have taken to protect credit unions from unfair or unreasonable inclusions to UBIT. Despite efforts to battle the issue outside the courts, litigation over this issue is not out of the question. In fact, Blanchard suggested this may occur early next year.
 
In the meantime, it’s not too early for credit unions to prepare for potential audits in light of the issues surrounding UBIT. Patzner, who is co-chair of the UBIT Legal-Regulatory Subcommittee, offered specific recommendations for credit unions who find themselves under audit:

• Designate one senior officer as liaison to the auditor
• Identify and highlight the notion that credit unions serve members on a mutual and non-profit basis
• Identify empowering statutes and regulations to support the credit unions’ exempt purpose
• Identify facts related to each product to support the relation to exempt purpose
• Allocate direct and indirect costs to minimize net income
• Maintain a united front

Given the Internal Revenue Service’s definition of UBIT, Patzner said credit unions’ purpose – to serve their members’ needs, not to realize profit from product sales – should exempt them from being taxed on products that are not related to credit unions’ purpose. This includes insurance-related income such as credit insurance, AD&D, group life, health-related insurance and GAP insurance; securities and investment products; and non-member ATM fees.
 
Conversely, income that is related to a credit union’s exempt purpose and is not taxable includes interchange fees from debit and credit cards, check printing, collateral protection insurance and ATM fees from members.
 
Patzner told credit union leaders they should know the difference between direct and indirect expenses. Some common direct expenses include salaries and benefits, payroll taxes, licenses and registration, non-member ATM terminal, and transaction fees.
 
An allocation of indirect expenses occurs when facilities and personnel are used for dual purposes, that is, a cost attributable to an income source but shared with other sources of income or operational areas. According to Patzner, the key is that the expense allocation process is defined, documented and repeatable and produces a rational allocation of expenses associated with the unrelated business income. Some common indirect expenses include salaries and benefits, occupancy costs, IT costs, advertising costs, professional fees, ATM costs, postage and insurance.
 
Along with advice on how to approach and work under UBIT, Blanchard added that industry system leaders “will continue to fight for credit unions against the IRS’s misguided reasoning.
 
“This is all part of an ongoing process, which we don’t expect to be resolved until 2009 at the earliest,” said Blanchard. “Credit unions should consult with their tax and legal advisors regarding how to proceed.”
 
CUNA Mutual Group is the leading provider of financial products and services to credit unions and their members worldwide. More information on the company is available at www.cunamutual.com.