CUNA: IRS UBIT memo clears way for past-tax refunds for CUs
Credit unions have received a much-sought-after interpretation by the Internal Revenue Service that clears nearly all credit union products from being subject to unrelated business income tax (UBIT).
Finally bowing to the results of two federal court cases brought by credit unions, the IRS recently issued a memorandum that defines nearly all credit union products at stake in the litigation as "substantially related income"--not subject to UBIT.
Credit Union National Association President/CEO Bill Cheney hailed the "highly significant development," particularly as it signals that refund requests for past tax payments by credit unions may now be processed. "And--most importantly," Cheney said, "credit unions now may be able to offer products and services to their members in the future with a significantly diminished threat of having to pay this tax."
Larry Blanchard, chairman of a coalition of credit union groups that has supported the litigation, said of the IRS memo, "This is clearly a breakthrough with the agency. It signals that credit union tax refunds for past UBIT payments should now be processed."
He also emphasized that the IRS action bolsters credit union arguments that future payments to the IRS of UBIT on these same products may not be due.
"Credit unions should talk this over with their tax advisers. In any event, this is a welcome development for credit unions," Blanchard observed.
He added that the IRS memo reflects the agency's appreciation for rulings of the courts: That the credit union mission to serve members extends well beyond loans and savings accounts.
The coalition, called the UBIT Steering Committee, is comprised of representatives of the Credit Union National Association, CUNA Mutual Group, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors.
According to a three-page, March 24 "memorandum for all exempt organizations employees"--geared toward IRS examiners of exempt organizations, such as credit unions--revenue from the following income-producing activities are deemed by IRS "substantially related income" not subject to UBIT:
- Sale of checks/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;
- Credit life and credit disability insurance (not subject to UBIT if sold to members); and
- Guaranteed asset protection (GAP) auto insurance (not subject to UBIT if sold to members).
Royalty income from the marketing of accidental death and dismemberment (AD&D) insurance to credit union members is also exempt.
IRS has also indicated it will incorporate the memo into its Examination Manual to guide future audits of credit unions.
"After 15 years of work--and millions of dollars in litigation expenses--it is ironic that a breakthrough in the struggle of this scope comes down to a three-page memo," Blanchard said. "But the effort has been entirely worth the time and money, particularly for those credit unions who have filed their returns and made payments in the past."
In 2009, a jury in federal court ruled in favor of Community First CU, Appleton, Wis., as UBIT related to three insurance products; credit life and credit disability insurance and GAP products. The jury found that these products were substantially related to the tax-exempt purposes of credit unions.
In 2010, a federal court in Colorado ruled in favor of Bellco CU. The Greenwood Village, Colo.-based credit union challenged UBIT on income from many of the same products through its direct lending program and its indirect lending program for the tax year 2003 and the portion of tax year 2001 for which it had accurate income records.
As to the impact of the IRS guidance on future tax liabilities, neither the UBIT Steering Committee nor any of its members can provide tax advice to credit unions. The committee urges credit unions to consult with their tax advisers on whether the IRS pronouncement, combined with the previous court rulings, provide "substantial authority" to refrain from reporting the affected categories of income in the future. In the past, a law firm retained by the Steering Committee has provided a general opinion on the impact of the court cases on the "substantial authority" issue.
There are, Blanchard pointed out, some remaining issues to be resolved related to the March 24 IRS memo.
"However," he noted, "this development gives us great hope that real light is at the end of the tunnel, and that credit unions will be able to offer products and services to their members in the future with a significantly diminished threat of having to pay this tax."
Resource Links: IRS decision Foley Lardner
Source: CUNA News Now
NCUA clarifies hearing comments on supplemental capital
The National Credit Union Administration has "very limited statutory authority" to establish supplemental capital that would benefit federally insured, consumer credit unions by enhancing their net worth for prompt corrective action purposes, agency general counsel noted in a follow-up letter to a Tuesday House Financial Services Committee hearing at which he testified.
During the hearing, Rep. Brad Sherman (D-Calif.) asked NCUA General Counsel Mike McKenna a series of questions regarding the NCUA's risk-based capital proposal, including one about supplemental capital as it relates to the RBC plan. The follow-up letter to committee leadership is intended to provide greater clarity on McKenna's answer, the agency said.
McKenna in response to Sherman said the agency could consider allowing credit unions greater access to supplemental capital as it finalizes proposed RBC regulations.
In his clarification letter, he noted that with the exception of low-income designated credit unions, Congress has limited the definition of "net worth" to retained earnings as defined by generally accepted accounting principles.
"Therefore, unless Congress amends the statutory definition of 'net worth,' other forms of capital, including supplemental capital, cannot legally be counted as 'net worth' for federally insured, consumer credit unions, other than those with low-income designation."
The Credit Union National Association has a different interpretation of the credit union capital statute. CUNA maintains that supplemental capital could be used for risk-based capital purposes under a regulatory proposal without legislative changes.
McKenna, in his letter to lawmakers, also noted NCUA concerns that a credit union's inability to raise capital outside of retained earnings limits its ability to serve its members. He reiterated NCUA's support for the Capital Access for Small Business and Jobs Act (H.R. 719). That legislation would give credit unions an additional tool to promote capital stability by issuing supplemental capital that would count as net worth.
The NCUA general counsel concluded his letter by offering to work with House Financial Services Committee members on H.R. 719 or any similar proposal that would increase access to supplemental capital for "healthy, well-managed" credit unions.
Source: CUNA News Now
Heartbleed bug could threaten website security
As was widely reported in the news media Wednesday, any organization with a website should become educated about a new and stealthy invader "the Heartbleed bug" to determine if it is a threat to their operation.
As described by CNNMoney, the bug leaks information by creating a hole in the software that "the vast majority" of websites use to turn consumers' personal information into more secure strings of random numbers and letters.
Consumers are often advised to look for a padlock image in the address bar of a website with whom they are sharing information. That's a step that website users have been able to easily take to make sure their information is secure or at least more secure.
However, CNNMoney said now if you see this padlock image it confirms that there's a "good chance" that site is using the encryption software that can be exploited by the Heartbleed bug.
According to several news reports, the bug:
- Exposes usernames and passwords;
- Compromises a user's web session in a way that allows another person to pose as that user--no password required; and
- Enables fraudsters to pose as a legitimate website and bait users into revealing personal information.
SilverSky, a provider of cloud-based managed security solutions and a CUNA Strategic Services alliance provider, has contacted customers with a message regarding Heartbleed, calling it a "vulnerability in the OpenSSL encryption standard."
SilverSky recommends that everyone using OpenSSL patch and update to the latest version.
Also, CUNA Mutual Group is developing a risk alert for credit unions on the Heartbleed bug.
Source: CUNA News Now
Financial Regulators Release Statements on Cyber-Attacks on Automated Teller Machine and Card Authorization Systems and Distributed Denial of Service Attacks
The Federal Financial Institutions Examination Council (FFIEC) members are issuing statements to notify financial institutions of the risks associated with cyber-attacks on Automated Teller Machine (ATM) and card authorization systems and the continued distributed denial of service (DDoS) attacks on public-facing websites. The statements describe steps the members expect institutions to take to address these attacks and highlight resources institutions can use to help mitigate the risks posed by such attacks.
Cyber-attacks on financial institutions to gain access to, and alter the settings on, Web-based ATM control panels used by small- to medium-sized institutions are on the rise. The members expect financial institutions to take steps to address this threat by reviewing the adequacy of their controls over information technology networks, card issuer authorization systems, ATM usage parameters, and fraud detection processes. In addition, the members expect financial institutions to have effective response programs to manage this type of incident.
The members also expect financial institutions to address DDoS readiness as part of their ongoing information security and incident plans. More specifically, each institution is expected to monitor incoming traffic to its public website, activate incident response plans if it suspects that a DDoS attack is occurring, and ensure sufficient staffing for the duration of the attack, including the use of pre-contracted third-party servicers, if appropriate.
Cyber-attacks on Financial Institutions’ ATM and Card Authorization Systems (PDF)
Distributed Denial-of-Service (DDoS) Cyber-Attacks, Risk Mitigation, and Additional Resources (PDF)
NCUA Hosting Twitter Chat on Financial Literacy – April 23
NCUA is hosting their second Twitter chat focused on financial literacy on April 23 from 11 a.m. until noon, Eastern, to be hosted by Kenneth Worthey, Financial Literacy and Outreach Analyst with NCUA’s Office of Consumer Protection. Credit unions and consumers are encouraged to follow the conversation and contribute using the #NCUAChat hashtag on Twitter. Participants can submit questions ahead of time to email@example.com
Tighter rules may be on the way for alternative currencies
Money-laundering and know-your-customer controls will need to be applied to virtual currency transactions such as those made through bitcoin, U.S. Attorney General Eric Holder told U.S. House Committee on the Judiciary members this week.
These controls would help fight illegal activity on these marketplaces, Holder said ( Finextra.com April 9). The Department of Justice is working with financial regulators to assess the issue, Holder said, noting that the popularity of alternative currencies among criminals has created a new issue for law enforcement and regulators alike.
The new government attention has made some fear that tightening regulations could tighten the online currency business, Finextra.com wrote.
The question is not if the government will regulate online currencies, but when and which agency will oversee the transactions, MarketWatch.com reported (April 9).
There must be regulation, Boston University professor Mark Williams told participants at a recent MarketWatch panel discussion held in New York. Consumer protection must be a focus, he added.
Bitcoin Investment Trust creator Barry Silbert argued that bitcoin is regulated, noting that the Financial Crimes Enforcement Network has released guidance on virtual currencies. Silbert said the Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission and the Federal Trade Commission are not likely to regulate the nascent currency.
State regulators and the Consumer Financial Protection Bureau may be the bodies in charge of rulemaking for bitcoin, he said. The CFTC may develop regulations if bitcoin derivatives are created, he added.
Source: CUNA News Now