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Statement of American Bankers Association
The American Bankers
Association appreciates having this opportunity to submit written comments for
the record of the Subcommittee on Oversight’s July 24, 2007, hearing on
tax-exempt organizations.
The American Bankers
Association, on behalf of the more than two million men and women who work in
the nation’s banks, brings together all categories of banking institutions to
best represent the interests of this rapidly changing industry. Its membership
– which includes community, regional, and money center banks and holding
companies, as well as savings associations, trust companies, and savings banks
– makes ABA the largest banking trade association in the country.
As the Subcommittee on
Oversight (the “Subcommittee”) undertakes its examination of tax-exempt issues
this year, the ABA would like to take this opportunity to encourage the
Subcommittee to review the Internal Revenue Service’s (“IRS”) regulation of
issues relating to tax-exempt credit unions. In particular, we urge the
Subcommittee to: focus on the IRS’s activities relating to the application of
the unrelated business income tax (“UBIT”) to credit unions, and encourage the
IRS to revise its tax-exempt group return regulations to require credit unions
to file individual Form 990s.
Application of UBIT to State-Chartered Credit Unions
State-chartered credit unions are subject to tax on
income earned from trade or business
activities that are not substantially related to the functions constituting the
basis for their tax exemption. Credit unions are self-help financial
cooperatives established for the purpose of promoting thrift and providing low
cost credit to their members – especially to persons with low and moderate
incomes – through mutual and nonprofit operations. When these organizations
offer services to non-members, or undertake activities that stray beyond the
exempt purposes for which they were formed, the income from such activities
should be subject to taxation. In such cases, they are directly competing with
other small businesses in the communities in which they operate.
Over the past year, the
IRS has issued a series of technical advice memorandums (“TAMs”) which
essentially hold that UBIT applies to various activities undertaken by
state-chartered credit unions including, among others, income from insurance
sales (e.g., credit life, disability life, health, group life, and accidental
death and dismemberment), sale of car warranties, and ATM fees for non-member
services.[1]
The ABA is pleased that
the IRS has been focusing on this important issue, because we believe that the
ability of credit unions to conduct business activities unrelated to their core
purpose without paying taxes on the income from such activities creates an
overwhelming competitive disadvantage for the banks that operate in the same
communities. However, we believe that the application of UBIT to
state-chartered credit unions is not an issue that should be determined on a
piecemeal basis through a series of TAMs alone. While TAMs help IRS personnel
resolve complex issues, they generally are not be relied upon as guidance or
cited as precedent by taxpayers other than the specific taxpayer for whom the
TAM was issued.
The application of UBIT
to credit unions is an issue that would be more properly addressed in generally
applicable binding IRS guidance, such as regulations or a revenue ruling that
provides clear notice to the credit union industry of the IRS’s interpretation
of the law. We urge the Subcommittee, as it continues to examine issues
relating to the IRS’s regulation of the tax-exempt sector, to encourage the IRS
to place a high priority on the issuance of binding guidance on the application
of UBIT to tax-exempt credit unions.
Equally important, under current interpretations
federal credit unions have been held to be exempt from UBIT.[2]
Although this exemption is based upon a broad reading of the tax exemption
provided under the Federal Credit Union Act (12
U.S.C. sec. 1767),[3]
there is no tax (or other) policy reason for such a significant distinction for
federal credit unions. When federal credit unions operate unrelated
businesses, the same detrimental competitive effects that result from state
credit union unrelated activities apply – competing taxable banks and other
businesses in their communities are adversely affected by their operation of
such businesses – and the federal revenue is diminished by applying this
exemption to business activities beyond the purpose of the credit union
charter. We believe it is wrong for the broad tax exemption provided to
federal credit unions also to encompass all income earned from businesses that
are unrelated to their exempt purpose, and we encourage the Ways and Means
Committee to pursue legislation to amend Code section 511(a)(2) to subject
federal credit unions to UBIT.
Form 990 Filing Requirements for
Credit Unions.
Tax-exempt organizations
generally are required to file annual information returns (Form 990) with the
IRS.[4]
The annual information return must contain the organization’s gross income,
receipts, disbursements, compensation, and other information required by the
IRS in order to review the organization’s activities and operations during the
previous taxable year, and to review whether the organization continues to meet
the statutory requirements for exemption. Only a very limited number of
organizations are statutorily exempted from this annual information filing
requirement. These include churches, religious orders, fraternal beneficiary
societies, and small organizations with annual receipts less than $5,000.
Information returns filed
by tax exempt organizations on Form 990 serve important public purposes beyond
simply enabling the IRS to enforce the tax laws. As the Joint Committee on
Taxation has noted[7]:
[t]he
public has a legitimate interest in access to information of tax-exempt
organizations. This public interest derives from the tax benefits accorded
under Federal law to such organizations, as well as the nature and purposes of
such organizations. The public has an interest in ensuring that tax-exempt
organizations are complying with applicable laws and that the funds of such
organizations (whether or not solicited from the general public) are being used
for the exempt purposes of the organization.
Congress also recognized
the importance of transparent financial
records for all companies by passing
the Sarbanes-Oxley Act of 2002. Many
credit unions are profitable, retail
financial service organizations whose activities are indistinguishable from
taxpaying banks. Vital information, such as their sources of income, expenses,
amounts of compensation paid to executives, and activities, should be subject
to public disclosure, both to ensure that they are operating effectively and
with integrity and for the efficient administration of the tax laws. Moreover,
without adequate information, credit
union members cannot understand their organization’s exposures and risks and cannot
exercise effective oversight and control over the board of directors and
management.
Despite these recognized
benefits from public disclosure requirements, a majority of state-chartered
credit unions do not file individual Form 990s. The IRS ruled in 1960[8]
that state credit unions were permitted to take advantage of the group return
rules set forth in Treasury regulations.[9]
These rules permit central or parent organizations to file one group return
providing aggregated financial information for the parent and any local
organizations subject to its general supervision or control. In the state
credit union context, this means that the state regulatory authority that
supervises credit unions within a state may apply for a group exemption ruling
and file one group return that aggregates information from all of the state
credit unions under its control or supervision.
At a November 3, 2005,
hearing of the House Ways and Means Committee, Steven T. Miller, Commissioner,
Tax-Exempt and Government Entities Division, testified that the IRS received
1360 individual Forms 990 from state chartered credit unions in 2003, the last
year for which data is available. Mr. Miller also testified that as of 2003,
34 state credit union associations filed group returns, and that 21 of the 34
group returns covered more than two thousand organizations.
Millions of members of
state credit unions do not have access to information on how their
organizations are being operated, because such information cannot be accessed
from group returns which contain only aggregate data. IRS officials have
acknowledged that this is a problem but have so far not corrected the problem.
Therefore, we urge the Subcommittee to look into this matter as part of its
examination of tax-exempt organization issues and to request that the IRS amend
its group return regulations to prohibit state credit unions from filing group
returns.
Again, we deeply
appreciate you allowing us to comment on this issue and share the concerns of
our members. If you have further questions, please do not hesitate to contact
me.
[1] See, e.g., Technical Advice Memorandum
200709072, March 2, 2007; Technical Advice Memorandum 20070903, March 2, 2007;
and Technical Advice Memorandum 200717036, April 27, 2007.
[2] I.R.C. sec. 511(a)(2)(A).
[3] 12 U.S.C. sec. 1767 provides
that "Federal credit unions organized hereunder, their property, their
franchises, capital, reserves, surpluses, and other funds, and their income
shall be exempt from all taxation, now or hereafter imposed by the United
States or by any State, Territorial, or local taxing authority... ."
[4] I.R.C. §6033.
[5] I.R.C. §6033(a)(2).
[6] I,R.C. §6033(a)(2)(C)(vi).
[7] Study of Present-Law Taxpayer Confidentiality and
Disclosure Provisions as Required by section 3802 of the Internal Revenue
Service Restructuring and Reform Act of 1998, Joint Committee on Taxation,
JCS-1-00, January 28, 2000, p. 6.
[8] Rev. Rul. 60-364, 1960-2 C.B. 382.
[9] Treas. Reg. §1,6033-2(d)
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