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New IRS Directive Will Benefit State Credit Unions

Added by Hawley Troxell in Articles & Publications, Banking Law, Tax Law on May 5, 2014

The IRS has recently issued a directive that will benefit state-chartered credit unions that receive revenue from certain ancillary products.

State-chartered credit unions are exempt from federal income tax under Internal Revenue Code Section 501(c)(14)(A), but are subject to a tax as “unrelated business income” (UBI). Historically, the IRS has required credit unions to pay UBI tax on income derived from activities unrelated to the credit union’s core deposit-taking and lending functions.

The IRS recently lost on this issue in a pair of tax-court decisions and has issued new directives to examiners instructing that revenue from the following products is not subject to UBI tax:

Sale of checks or 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

Sale of credit life and credit disability insurance to members

Sale of guaranteed auto protection (GAP) auto insurance to members

The IRS will also not tax the revenue a credit union receives from the sale of insurance products, such as accidental death and dismemberment insurance, to members under a royalty arrangement.

Tax will continue to apply to credit-union revenue from the following products when provided to non-members or not earned under a royalty arrangement:

Automobile warranties

Dental insurance

Cancer insurance

Accidental death and dismemberment insurance

Life insurance

Health insurance

ATM “per-transaction” fees for non-members

A key to understanding and applying this new directive is the complex federal tax law that has developed to distinguish royalty arrangements from services agreements. Credit unions should consult with their tax attorneys and other advisors to examine how this the new IRS directive can be most effectively applied to their businesses.

For more information contact our Banking group or call 208.344.6000