Bellco CU Court Decision May Be "Substantial Authority" in UBIT Treatment of Financial Products for Members

March 5, 2010 — The law firm of Foley and Lardner, LLP, explained in a recent memo that in their opinion, a November 2009 court decision could represent "substantial authority" under federal tax law for the position that selling financial products and services to a credit union's members is exempt from unrelated business income tax (UBIT).

Substantial authority means that a credit union would not be subject to a civil tax penalty if it filed a UBIT tax return, the Form 990-T, treating income from the sale of financial products to members as exempt from UBIT.

A copy of the memo has been provided to state regulators, state-chartered credit unions and credit union leagues.

Bellco Credit Union (Greenwood Village, Colo.) requested a refund of nearly $200,000 on income from UBIT taxes paid during the 2000, 2001 and 2003 tax years on the sale of credit life and disability insurance, accidental death and disability insurance and income from a securities product.

In November 2009, the federal judge presiding over the case issued a summary judgment stating that income from investment products made available by a state-chartered credit union to its members (as stocks, bonds, mutual funds and annuities) is not subject UBIT. A trial was held in December 2009 to determine the treatment of income from credit life & disability insurance sold to Bellco member borrowers and direct mail sales of AD&D insurance to Bellco members by an outside vendor. Once the court decides all the issues in the case, either side may file an appeal. A decision has not yet been issued by the judge on these matters.

The UBIT Steering Committee, comprised of NASCUS, CUNA, CUNA Mutual and AACUL, does not give tax advice to credit unions and recommends that credit unions discuss the applicability of this memo with their counsel and tax advisers.
Foley and Lardner reminded the credit union community that if the Bellco decision is appealed, the substantial authority would be reversed. Also, the court in the Bellco case decided that income from selling financial products and services to non members is subject to UBIT.

To view the full memo, follow this link. (Member log-in required).