In a recent memorandum (found here), the IRS issued instructions to all exempt organization examiners on the applicability of unrelated business income tax (“UBIT”) to certain income earned by state-chartered credit unions described in section 501(c)(14)(A) of the Internal Revenue Code. The memorandum provides that the income earned from certain activities of state-chartered credit unions will no longer be subject to UBIT. The memorandum does not apply to federal credit unions or exempt organizations described under any other subsection of 501(c).
In general, an exempt organization is taxed on income derived from a trade or business that is not substantially related to its exempt purposes, and, in the past, income earned by state-chartered credit unions from the sale of credit life and disability insurance, as well as guaranteed auto protection (“GAP”) insurance, was subject to UBIT. However, following the district court decisions in Bellco Credit Union v. United States, 735 F. Supp. 2d 1286 (D. Colo. 2010) and Community First Credit Union v. United States, 2009 WL 2058476 (E.D. Wis. July 14, 2009), the recent memorandum instructs examiners, when examining the original or amended Forms 990-T of state-chartered credit unions or any refund claims by state-chartered credit unions, to treat income earned from the sale of such products as substantially related income that is not subject to UBIT when sold to credit union members. The income earned by state-chartered credit unions from the sale of credit life and disability insurance and GAP insurance to non-members remains subject to UBIT.
The memorandum goes beyond adopting the Bellco and Community First decisions and also instructs examiners to treat income earned from the following sources as substantially related income that is not subject to UBIT: the sale of checks and fees from a check printing company, interchange fees from debit and credit card programs, interest from credit card loans, and the sale of collateral protection insurance. However, income earned from the marketing of certain insurance products (including automobile warranties, dental insurance, cancer insurance, accidental death and dismemberment insurance, life insurance, and health insurance) and, unless there is a royalty arrangement, the sale of insurance products other than credit life and disability insurance and GAP insurance remains subject to UBIT.