release number release date te_ge technical_advice_memorandum internal_revenue_service uil date area manager - taxpayer's name taxpayer's address taxpayer's identification_number years involved conference held legend t v issues whether funds derived by t a state-chartered credit_union described in sec_501 of the internal_revenue_code from the following activities should be treated as unrelated_business_taxable_income under sec_511 of the code a b sale of insurance products interchange income’ derived in connection with t’s visa credit card and checkcard program facts established in t is a state-chartered credit_union which is recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 the purpose of t as set forth in the corporate by-laws is to promote thrift among its members by affording them an opportunity for accumulating payments on shares and to make loans therefrom to its members for provident and productive purposes t’s activities include accepting deposits from and maintaining the accounts and savings of its members these deposit accounts include savings or share accounts on which members earn periodic dividends credited to the accounts and share draft accounts which are transaction accounts similar to bank checking accounts t represents that its day-to-day business operations differ from conventional banking institutions in several ways t states that it conducts its business to reflect its non-profit mutual structure t makes loans to its members and states that many borrowers have low incomes and might not otherwise qualify for credit from conventional for-profit banks t also represents that it regularly issues loans for very small amounts such as loans for auto repairs which are typically not made by for-profit banks t indicates that it serves smaller communities than those served by for-profit banks t also indicates that because of its mutual non-profit operation all members not just those maintaining high minimum balances are able to earn competitive rates on their deposits and pay low banking fees t represents that in order to maintain its financial viability and continue to satisfy its stated purposes of promoting thrift and providing a source of low cost credit it has endeavored to become a full service financial_institution consequently t offers more than just demand deposits and loans currently t makes insurance products and visa credit card and checkcard program available to members the different types of insurance are described in more detail below a group return was filed by the state banking department each credit_union included in the group return is represented as a separate corporate entity t was included in the form_990 group that is exempt from federal_income_tax return on the basis that it was in fact operating as a state-chartered credit_union as of the close of the tax_year there is no record of t unrelated_business_income_tax return for the year at issue filing a form 990-t a sale of insurance products t contracted with an independent insurance_company to offer credit life and credit disability insurance to its members t and at least one employee are required to be licensed by the state department of insurance in order to offer and or sell this insurance to members t derives a fee based on a fixed percentage of gross premiums from the insurance_company to market these products and perform certain administrative services in connection with the insurance program t offers credit insurance to each member when a loan application request is made a member's participation in the insurance program is voluntary and is not a prerequisite for the approval of a loan application if a member elects to receive coverage he or she will sign the required forms provided by t on behalf of the insurance_company the insurance policies provide in pertinent part that the outstanding loan balance subject_to any cap on the insured amount will be repaid to the credit_union by the insurer upon the death of a member or by payment of or reimbursement of the contractual loan installments in the case of disability a member who elects to purchase credit insurance is required to pay the premiums to t for coverage t prepares a premium remittance report on a monthly basis that summarizes the insurance premiums payable to the insurance_company the report identifies the gross premium charges the administrative fee at the contract rate to be retained by t and the net_premiums to be remitted by t for administrative convenience and to ensure timely payment of premiums to the insurer t adds the premium charge to each member's loan balance and remits the premiums to the insurer net of the administrative fee ultimately recovers the premiums as the member makes payment s on his or her loan the insurance_company may issue a refund to t based on the claims experience rating than crediting members’ accounts t retains any refund attributable to experience rating rather t t also performs certain marketing and administrative services on behalf of one or more insurance_companies in connection with other insurance products offered to members such products include but are not necessarily limited to accidental death and disability credit card life and disability and life_insurance policies that any member may subscribe to and elect to pay for through his or her credit_union account these kinds of insurance are offered independently of any loans the member may have with the credit_union t derives a fee on a periodic basis for services rendered to the insurance_companies t earned fees from its insurance program in excess of dollar_figure examination during each of the tax years under interchange income derived in connection with t’s visa credit card and b checkcard program as a member of visa usa inc visa t is authorized to offer its members a visa credit card visa is an association of financial institutions that issue payment cards using visa’s infrastructure and brand t became a member of visa through a sponsorship arrangement made by v an organization that sponsors its member credit unions for membership in bankcard programs and arranges for the provision of credit card and debit card processing services for its membership t’s membership in visa will hereinafter be referenced using the term member by reason of being a member t is subject_to the visa by-laws and operating regulations which prescribe the duties and responsibilities applicable to card issuers as a member that issues visa credit cards t is authorized to enter into direct contractual relationships with its cardholders and extend credit to and collect payments from cardholders ie members t markets its visa brand credit card approves or rejects applications for credit cards and performs a variety of administrative functions in accordance with the visa operating regulations furthermore t is at risk for credit it extends in connection with the use of the credit card and is responsible for the collection of any debt t’s members apply for a credit card by completing a standard application form t then approves or rejects the application based on the loan criteria that it has established if a member is approved for a credit card t will extend a line of credit subject_to limitations in connection with the use of such card credit cards offered by t at times vary with respect to the credit line interest rate and benefits attendant to the card t has two sources of revenue from its members’ use of visa credit cards summarized as follows line of credit - t earns interest_income on the unpaid balance of any line of credit extended in connection with the visa credit cards the terms and conditions pertaining to the credit cards including the interest rate charged are set forth in the cardholder agreement executed between t and each approved member t also receives income from certain fees and service charges as provided in the cardholder agreement including cash advance fees late penalty payment fees over limit fees and card or personal identification_number pin replacement fees although the name of the credit_union and visa logo are conspicuously present on the face of the plastic card only t bears any loss from a member's default on his or her obligation merchant assessments - by reason of its membership in visa and its active role in the marketing and issuance of visa brand credit cards t derives revenue from fees charged to retail businesses participating in the visa payment system visa processes the series of transactions that begin when a cardholder makes a purchase of goods or services using a visa brand credit card however a credit card transaction cannot be consummated if the retail business at which the transaction cycle begins is unwilling to accept them in order to foster card issuance and usage visa and its member institutions have developed and implemented visa net an advanced network that acts as an authorization service for visa card transactions as well as a clearing and settlement service to transfer payment information between parties technological developments marketing and other factors have encouraged retail businesses including supermarkets restaurants chain retailers and hundreds of thousands of other vendors and merchants collectively referred to as the merchants to accept visa cards as a payment option every transaction using a visa card incurs costs including but not limited to the point of sale pos terminal s provided to merchants that facilitate the transactions the visa network transmission lines and software that link the transaction authorization and related sales data between the merchants and visa and the expense associated with the credit union’s agent which may also be a member of visa that processes the transaction and converts it to statement form for the multiple parties involved each merchant that accepts visa cards as a payment option must contractually agree ie the merchant agreement to pay a fee related to the transaction processing costs of visa card payments the fees assessed against merchants otherwise known in the industry as interchange income may vary by card product processing technology and merchant category but are generally based on a percentage of net sales plus a fixed transaction fee interchange income is generated from a payment system that operates every day of the year on a continuous basis the interchange income derived by visa is apportioned among the members that issue payment cards in accordance with a revenue sharing arrangement that credits a member's settlement account for that portion of interchange income attributable to its cardholders’ purchases accordingly t derives interchange income based on the consumer purchases made by its own members using the visa credit card the payment of interest charges and related service fees by a member of t pursuant to the cardholder agreement is not contingent on although it may be derived from credit card purchases this is evidenced by the fact that a member may incur credit card debt for instance by borrowing through cash advances without generating interchange income likewise a member may use his or her card to purchase goods or services which generate interchange income to t without incurring interest charges this is demonstrated by a member who pays the current month’s charges in full thereby maintaining a zero balance card both the interchange program and cardholder loan program incur a variety of expenses directly related to the type of income that each business produces due to the size and complexity of the credit card program t contracts directly and indirectly through v with an outside vendor that is able to capture and process data related to the interchange program from access to the visa network that records credit card purchases and the cardholder program from information furnished by t the processing vendor vendor maintains a separate settlement account to record the interchange income and related expenses pertaining to t as well as the expenses attributable to the cardholder program t receives a statement from the vendor on a monthly basis that details the amount of interchange income credited to its account and the itemized charges related to both the interchange and cardholder programs expenses charged to t in connection with the interchange program include authorization fees transaction processing fees and marketing fees including scoreboard redemption fees expenses_incurred and charged by the vendor to administer certain functions of t’s cardholder loan program include statement and notice fees security fees and pass-thru postage and delivery fees other expenses such as card issuance file residency maintenance and inquiry appear to be allocable to both the interchange and cardholder programs additional fees royalties and assessments may be charged to t directly by visa or indirectly through the vendor as they pertain to one or both programs t also offers its members a visa checkcard which can be utilized as either in order to use a checkcard a member must open a debit card or a pos card and maintain a sharedraft account a sharedraft account is analogous to a checking account at a bank the checkcard offers t’s members the convenience of withdrawing funds or purchasing goods or services without writing a manual sharedraft equivalent to a check a member may use the checkcard as a debit card to withdraw funds at an atm or to make purchases by keying in a personal identification_number or pin alternatively the member may use the checkcard as a signature required pos card the checkcard effectively taps into the visa network lines similar to a credit card except that it authorizes the transfer of funds from the member's sharedraft account there is generally no credit line extended in connection with the use of the checkcard since the member is expected to have sufficient funds in his or her account similar to its credit card program t derives interchange income from its visa checkcard program by virtue of its membership in visa and the services that it performs on behalf of visa in the marketing and issuance of its products the rate of checkcard interchange income is also determined by visa’s contractual arrangement with its participating merchants and may also vary based on the card product processing technology and category of merchant according to t the credit_union uses the vendor to process its check card transactions interchange income and expenses directly connected with interchange income are reported by the vendor on a monthly settlement account statement t maintains separate general ledger accounts to record the interest_income and interchange income derived from credit card and checkcard transactions during each tax_year under examination t derived gross interchange income in excess of dollar_figure law sec_501 of the internal_revenue_code code provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 of the code specifically exempts from federal_income_tax credit unions without capital stock organized and operated for mutual purposes and without profit sec_1_501_c_14_-1 of the income_tax regulations regulations provides in part that credit unions other than federal credit unions described in sec_501 of the code without capital stock organized and operated for mutual purposes and without profit are exempt from tax under sec_501 state-chartered credit unions were first acknowledged as exempt from federal_income_tax in a opinion of the attorney_general the attorney_general considered credit unions organized under the laws of the commonwealth of massachusetts the attorney general's opinion described the purposes of credit unions existing at that time i t is apparent that the purpose of these financial associations is to help people save and to assist those in need of financial help whose credit may not be established at the larger banks in reality they are fundamentally similar and supplemental to the existing agencies for promoting thrift namely the savings banks and cooperative banks except on a much smaller scale the attorney general’s opinion also described some of the operations of credit unions--making loans in appropriate amounts to members on which a low rate of interest is charged and that p rompt payment of obligations is a fundamental requirement the opinion described in detail the procedures by which members’ savings were held by the credit_union and how the members earned interest on their deposits the opinion also pointed to the democratic character of the governance of these early credit unions by their members at the annual meeting of the association each member shareholder and depositor has but one vote after review of the features and operations of these early massachusetts credit unions the attorney general's opinion held that state-chartered credit unions would be exempt from federal_income_tax see u s op atty gen the legal analysis of the attorney general's opinion was adopted in treasury regulations issued in and this remained the official basis for the tax exempt status of state-chartered credit unions until the revenue act of granted express statutory tax-exempt status to state-chartered credit unions however the revenue act of removed tax exemption from savings and loan associations cooperative banks and mutual_savings_banks the legislative_history of the act suggests that the reason these entities lost their exemption was because of their increasing similarity to commercial banks and the resulting loss of their original characteristic of mutuality specifically referring to the early days of these institutions the legislative_history states the fact that the members were both the borrowers and the lenders was the essence of the mutuality of these organizations see generally s rep no date reprinted in u s code cong ad svc present-day sec_501 - as enacted in - incorporates the requirements of mutuality and non-profit operation which formed the basis for the attorney general’s recognition of credit unions’ tax-exempt status in accordingly the basic purposes of the credit_union tax exemption remain essentially the same today as they were in based on the attorney general’s opinion the basis for exemption is the provision of savings accounts and loans to members who may not be served by banks in a non-profit and mutual manner sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 sec_512 of the code provides that the term unrelated_business_taxable_income means with certain modifications the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_513 of the code defines the term unrelated_trade_or_business in the case of any organization subject_to tax imposed by sec_511 as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for the income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is with certain exceptions includable in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the term trade_or_business has the same meaning it has in sec_162 of the code and generally includes any activity carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that in determining whether a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued hence for example specific business activities will ordinarily be deemed regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that gross_income is derived from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities that generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a strong one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those exempt purposes whether activities contribute importantly to an organization’s exempt purposes depends in each case upon the facts and circumstances involved in 693_f2d_525 5th cir a business league described in sec_501 of the code engaged in several activities including the endorsement of insurance to its members the court analyzed whether these activities were substantially related to the business league's exempt_purpose under sec_501 of advancing the credit_union movement in order to determine whether income generated from those activities resulted in unrelated_business_income to the business league in its analysis the court stated that the substantial relationship’ determination is necessarily a fact- based inquiry id pincite the court also noted that the regulations under sec_513 require a case-by-case identification of the exempt_purpose an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted the league promoted the purchase of insurance policies from a particular carrier providing the carrier with convenient services in the marketing and administration of its programs the court stated that the league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue the court also discussed at length the distinction between group and individual benefit the court said the distinction between inherently group benefits and individual benefits is analogous to the aggregate entity concept familiar in partnership_taxation a partnership may enjoy benefits in his separate just as a member of capacities as partner and non-partner so may a member of the league may enjoy benefits both as a league member and as an individual credit only those activities that benefit the credit unions in their capacities union the be considered substantially as league members can this group benefit standard also accords with league’s exempt_function the requirement that a business league seek to improve the conditions of an entire line_of_business rather than perform discrete services for individuals see sec_1_501_c_6_-1 when the activities of a business league are directed toward the achievement of the common business its members are interest inherently group benefits its members the benefits that accrue to related of to id pincite the court continued its analysis by stating that insurance endorsement and administration is not the sort of unique activity that satisfies the substantial relationship_test nor is its benefits group-related id pincite rather than merely advising members of the availability and desirability of insurance coverage to credit unions generally the league promoted the purchase of polices from a particular carrier the court affirmed the district court’s rationale that the league’s insurance activities did little more than generate revenue because the league’s endorsement was basically a fundraising activity it was by definition unrelated business activity under sec_513 id pincite therefore the court concluded that the league’s insurance activities were not substantially related to its tax-exempt purpose of advancing the credit_union movement rather the connection between the furtherance of the credit_union movement and the selling of insurance was at best tangential in 78_tc_246 affd 726_f2d_1097 6th cir the court held that promotional and administrative fees and an experience rating reserve refund received by a business league described in sec_501 of the code for promoting group_insurance programs for its members constituted unrelated_business_taxable_income under sec_512 in holding that the business league’s activities were not substantially related the court considered whether the league’s insurance activities contributed importantly to the league’s exempt_purpose of advancing the common business interests of independent insurance agents the court stated the burden is on the taxpayer to show that the challenged activities contribute directly and importantly to the improvement of conditions in a particular line_of_business the court noted that the petitioner's insurance activities did little more than generate revenue for the association and provided members with a convenient and economical service in the operation of their agencies as such they stood in sharp contrast to petitioner's educational and legislative activities which served the broader purpose of improving the general business environment in which insurance agents operated thus the court found petitioner's activity of promoting insurance was not substantially related to its exempt_purpose in la caisse popu563_f2d_505 1st cir the government unsuccessfully challenged the exempt status under sec_501 of the code of an organization chartered as a credit_union by the state of new hampshire the government maintained that the organization was not exempt because it offered a wide variety of services typically offered by nonexempt full service banks and was therefore not organized or operated as a credit_union among these services were checking accounts mortgage loans banking by mail safe deposit boxes and a night depository this case focused solely on the taxpayer's exemption under sec_501 and did not address the provisions of sec_511 through in 646_fsupp_1199 n d ala a credit_union described in sec_501 of the code offered cancer and group_life_insurance to its individual members the issue was whether commissions the credit_union received from servicing these particular types of insurance policies constituted unrelated_business_income under sec_512 the court did not reach the issue for jurisdictional reasons however it stated in a footnote that the petitioner would have lost on the merits of this issue because the policies benefited the insured without any reference to the member's loans or accounts with the credit_union that court stated in dicta that cancer and group_life_insurance offered by a credit_union to its members would result in unrelated business table income for the following reasons petitioner earned commissions for servicing cancer and group_life_insurance policies these policies were for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union petitioner derived no benefit from the policies other than commission on the sale of said policies earned from the insurance_companies which issued the policies the sale of the cancer and group_life_insurance policies referred to had no substantial causal relationship to petitioner's exempt purposes and the sale of the policies bore no relationship to petitioner's function as a credit_union id pincite n revrul_69_282 1969_1_cb_155 provides that an organization must be formed and operated under the state law governing the formation of credit unions to qualify for exemption under sec_501 of the code as a state- chartered credit_union revrul_72_37 1972_1_cb_152 provides that to qualify as a credit_union_exempt from income_tax under sec_501 a of the code an organization must in addition to being formed and operated under a state credit_union law operate without profit and for the mutual benefit of its members the revenue_ruling clarified revrul_69_282 stating that a state charter is a threshold requirement for exemption but not the sole requirement revrul_60_228 1960_1_cb_200 interprets the substantially related requirement of sec_513 an organization exempt from federal_income_tax as an agricultural_organization described in sec_501 of the code promoted wider insurance coverage among its members and other local farmers including life casualty and fire insurance the insurance programs are provided by several insurance_companies but the organization’s administrative and secretarial staff is assigned to the work the organization receives an overall fee from the insurance_company for office and other services rendered them in connection with the insurance programs the revenue_ruling provides that a trade_or_business is substantially related to an organization’s exempt_activities if the principal purpose of the trade_or_business furthers these exempt purposes however in this case such activities are not usually associated with the functions of an agricultural_organization and normally would not be carried on by such an organization in furtherance of its exempt purposes therefore these activities are not substantially related to the organization’s exempt purposes thus the income resulting from these activities is subject_to tax under sec_511 analysis in determining whether an income-producing activity is an unrelated_trade_or_business it is necessary to show that there is a trade_or_business the trade_or_business is regularly carried on and the conduct of the trade_or_business is not substantially related to the organization's exempt_purpose or function see sec_1_513-1 a of the regulations t has agreed that the activities at issue are trade_or_business that is regularly carried on therefore the sole issue is whether each activity is substantially related to the organization’s achievement of its exempt purposes gross_income is derived from an unrelated_trade_or_business if the conduct of the trade_or_business is not substantially related other than through production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations determination of the substantial relationship issue requires an examination of the relationship between the business activities which generate the particular income in question and the accomplishment of the organization’s exempt purposes id the regulations further state that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations see also prof ins agents of michigan supra insurance activity was not substantially related because activity did little more than generate revenue and provide members with a service and did not further taxpayer's exempt_purpose of improving business conditions and louisiana credit_union league supra league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue and at best was only tangentially related to the furtherance of the league’s exempt_purpose of improving business conditions of one or more lines of business the court found the requisite substantial relationship lacking for t’s activities to escape taxation as unrelated_business_income the activities must contribute directly and importantly to the accomplishment of one or more of t’s exempt purposes-promotion of thrift and providing low cost credit for its members through mutual and nonprofit operation sec_1_513-1 of the regulations see also prof'l ins agents of michigan supra we address each of the activities below insurance t argues that the sale of credit disability insurance is directly related to the credit union’s specific exempt purposes of fostering thrift among the members including both the extension of credit to members on reasonable terms and encouraging savings among the members and providing services to members on a mutual basis t further maintains that credit insurance which is an integral part of a member loan transaction is a mechanism for assuring the prompt repayment of debts in situations where the financial resources of the borrower and the borrower’s family become strained as a result of disability the facts do not show how sales of credit disability insurance contribute directly and importantly to accomplishing t’s exempt purposes credit disability insurance is not required for the approval of a loan insurance is not available to members on certain types of loans such as mortgage and other real_estate loans the member decides whether to purchase credit disability insurance based on his or her own assessment of whether the in fact credit disability insurance will provide a benefit to that individual member the individual member benefits in that the member need not worry about paying a loan to t in the event of disability while there is also a benefit to the credit_union as the beneficiary the facts do not show how the sale of credit disability insurance otherwise contributes importantly and directly to accomplishing t’s exempt purposes other than through the production_of_income availability of credit disability insurance does not encourage savings or assist t in offering low cost credit t does not take into consideration the need for this insurance by members t performs no studies to determine which members may need credit disability insurance and there is no required corresponding counseling to members who may have more need than others although t’s staff may recommend insurance based on the level of personal and family resources these recommendations are not mandatory in specific cases and coverage is not required in these cases applying the factors of alabama central credit_union supra t earns commissions for providing credit disability insurance sells policies for the express benefit of the insured albeit with reference to a member's loan with the credit_union derives some benefit from the credit disability insurance but the primary benefit is production_of_income both through the commission on the sale of the insurance earned and the bonuses paid to t employees the insurance referred to has no substantial causal relationship to t’s exempt purposes and the insurance bears no relationship to t’s function as a credit_union looking at the facts with respect to credit disability insurance the sale of credit disability insurance is not substantially related to t’s exempt purposes the available information indicates that the sale of insurance is primarily for the purpose of generating income to t and some of its employees and for the benefit of the insured rather than for the benefit of t's membership based on all of the facts and circumstances t’s activities with respect to the sale of credit disability insurance do not contribute importantly to accomplishing t’s exempt purposes therefore the sale of credit disability insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit t argues that making ad d and other types of insurance available to members is substantially related to the credit union’s exempt_purpose of promoting thrift by providing basic financial protection to members on a mutual t also argues that these insurances facilitate prompt repayment of loans basis on a mutual basis by protecting the individual member's financial security the facts do not show how t’s sales of these insurances contribute directly and importantly to t’s exempt purposes t has not demonstrated that sales of insurance encourage savings by members who purchase it t has also not provided information showing that the sale of insurance aids a member in obtaining credit or reduces the cost of providing credit to members the facts do not demonstrate that the sale of insurance to individual members advances t’s mutual operation insurance provides a financial protection to an individual the individual's purchase of insurance does not provide a benefit to the members as a whole the legislative_history of sec_501 of the code indicates that mutuality is tied to the same members being the borrowers and lenders in loan transactions rather than the general principles that t espouses s rep no date t has not stated how the sale of insurance to an individual provides a mutual benefit to t's members the facts also do not show how sale of insurance benefits the members of the credit_union as a whole a member may if a member of t purchase insurance without obtaining credit or a loan from t receives accidental dismemberment insurance payments the member may use the insurance payments as he or she wishes rather than saving them or paying in the case of accidental death the member's beneficiary off an obligation to t may or may not be a member of t and also may use the payments as he or she desires in alabama central credit_union supra the court stated in dicta several in this case t factors cited above relevant to the substantially related inquiry earns commissions for servicing ad d insurance policies sells policies for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union derives no benefit from the policies other than commission on the sale of the policies earned from the insurance_companies which issued the policies the sale of the insurance policies referred to has no substantial causal relationship to t’s exempt purposes and the sale of the policies bears no relationship to t’s function as a credit_union based on all of the facts and circumstances t’s activities with respect to the sale of insurance do not contribute importantly to accomplishing t’s exempt purposes the insurance sold benefits an individual and t receives no benefit other than the production_of_income therefore the sale of insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to unrelated_business_income_tax ubit interchange income derived in connection with t’s visa credit card and checkcard program making interest-bearing loans to members is a traditional activity of exempt credit unions_credit unions originally made unsecured personal loans to members because of changes in the financial marketplace and the expanded needs of financial_institution customers today all the types of loans made by t - including personal loans to members first mortgage loans and second-mortgage or home equity loans secured_by residential real_estate owned by the member small_business loans auto loans secured_by the automobile owned by the member whose purchase is financed by the loan and credit card loans - are recognized as substantially related to the exempt purposes and functions of t similarly activities attendant on these loan programs are also substantially related to t’s thrift-encouragement and mutual member service purposes credit card loans are extended to members as a component of the overall credit card program and ultimately the member lending program as a whole maintained by t accordingly the credit card program is substantially related to t’s exempt purposes therefore any net_income after deduction of related expenses arising from the card program specifically including but not limited to the interchange fees generated by merchant purchases is not subject_to unrelated_business_income_tax evolution and change in the financial marketplace over the decades govern the analysis of the other activities as well debit cards and atms are contemporary account access technologies which are provided in the context of a program with a number of features the debit card and atm programs as a whole are financial services that are substantially related to t’s exempt purposes as a financial_institution devoted to member service on a mutual and nonprofit basis any net_income from those overall programs interchange fees in the case of debit cards and fees from member use of t’s terminals in the case of atms is accordingly not subject_to unrelated_business_income_tax conclusions for reasons set forth above we conclude that the income received by a sec_501 credit_union from the sale of insurance products listed above are not substantially related to the furtherance of t’s exempt purposes and therefore are subject_to ubit interchange income derived by t in connection with its visa credit card and checkcard program is substantially related to the performance of t’s exempt_function and therefore does not constitute unrelated_business_income subject_to the tax imposed by sec_511 of the code a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


release number release date teige technical_advice_memorandum internal_revenue_service uil date area manager - taxpayer's name taxpayer's address taxpayer's identification_number years involved conference held legend t ve issues whether funds derived by t a state-chartered credit_union described in sec_501 of the internal_revenue_code from the following activities should be treated as unrelated_business_taxable_income under sec_511 of the code a b c sale of insurance products interchange income derived in connection with t’s visa credit card and checkcard program nonmember automated teller machine atm fees facts established in t is a state-chartered credit_union which is recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 the purpose of t as set forth in the corporate by-laws is to promote thrift among its members by affording them an opportunity for accumulating payments on shares and to make loans therefrom to its members for provident and productive purposes t's activities include accepting deposits from and maintaining the accounts and savings of its members these deposit accounts include savings or share accounts on which members earn periodic dividends credited to the accounts and share draft accounts which are transaction accounts similar to bank checking accounts t represents that its day-to-day business operations differ from conventional banking institutions in several ways t states that it conducts its business to reflect its non-profit mutual structure t makes loans to its members and states that many borrowers have low incomes and might not otherwise qualify for credit from conventional for-profit banks t also represents that it regularly issues loans for very small amounts such as loans for auto repairs which are typically not made by for-profit banks t indicates that it serves smaller communities than those served by for-profit banks t also indicates that because of its mutual non-profit operation all members not just those maintaining high minimum balances are able to earn competitive rates on their deposits and pay low banking fees t represents that in order to maintain its financial viability and continue to satisfy its stated purposes of promoting thrift and providing a source of low cost credit it has endeavored to become a full service financial_institution consequently t offers more than just demand deposits and loans currently t makes insurance products visa credit card and checkcard program and atm services available to members the different types of insurance are described in more detail below a group return was filed by the state banking department each credit_union included in the group return is represented as a separate corporate entity t was included in the form_990 group that is exempt from federal_income_tax return on the basis that it was in fact operating as a state-chartered credit_union as of the close of the tax_year there is no record of t filing a form 990-t unrelated_business_income_tax return for the year at issue a sale of insurance products t contracted with an independent insurance_company to offer credit life and credit disability insurance to its members t and at least one employee are required to be licensed by the state department of insurance in order to offer and or sell this insurance to members t derives a fee based on a fixed percentage of gross premiums from the insurance_company to market these products and perform certain administrative services in connection with the insurance program t offers credit insurance to each member when a loan application request is made a member's participation in the insurance program is voluntary and is if a member elects to not a prerequisite for the approval of a loan application receive coverage he or she will sign the required forms provided by t on behalf of the insurance_company the insurance policies provide in pertinent part that the outstanding loan balance subject_to any cap on the insured amount will be repaid to the credit_union by the insurer upon the death of a member or by payment of or reimbursement of the contractual loan installments in the case of disability a member who elects to purchase credit insurance is required to pay the premiums to t for coverage t prepares a premium remittance report on a monthly basis that summarizes the insurance premiums payable to the insurance_company the report identifies the gross premium charges the administrative fee at the contract rate to be retained by t and the net_premiums to be remitted by t for administrative convenience and to ensure timely payment of premiums to the insurer t adds the premium charge to each member's loan balance and remits the premiums to the insurer net of the administrative fee ultimately recovers the premiums as the member makes payment s on his or her loan the insurance_company may issue a refund to t based on the claims experience rating than crediting members’ accounts t retains any refund attributable to experience rating rather t t also performs certain marketing and administrative services on behalf of one or more insurance_companies in connection with other insurance products offered to members such products include but are not necessarily limited to accidental death and disability credit card life and disability and life_insurance policies that any member may subscribe to and elect to pay for through his or her credit_union account these kinds of insurance are offered independently of any loans the member may have with the credit_union t derives a fee on a periodic ‘basis for services rendered to the insurance_companies t earned fees from its insurance program in excess of dollar_figure examination during each of the tax years under interchange income derived in connection with t’s visa credit card and b checkcard program as a member of visa usa inc visa t is authorized to offer its members a visa credit card visa is an association of financial institutions that issue payment cards using visa's infrastructure and brand t became a member of visa through a sponsorship arrangement made by v an organization that sponsors its member credit unions for membership in bankcard programs and arranges for the provision of credit card and debit card processing services for its membership t’s membership in visa will hereinafter be referenced using the term member by reason of being a member t is subject_to the visa by-laws and operating regulations which prescribe the duties and responsibilities applicable to card issuers as a member that issues visa credit cards t is authorized to enter into direct contractual relationships with its cardholders and extend credit to and collect payments from cardholders ie members t markets its visa brand credit card approves or rejects applications for credit cards and performs a variety of administrative functions in accordance with the visa operating regulations furthermore t is at risk for credit it extends in connection with the use of the credit card and is responsible for the collection of any debt t’s members apply for a credit card by completing a standard application form t then approves or rejects the application based on the loan criteria that it has established if a member is approved for a credit card t will extend a line of credit subject_to limitations in connection with the use of such card credit cards offered by t at times vary with respect to the credit line interest rate and benefits attendant to the card t has two sources of revenue from its members’ use of visa credit cards summarized as follows line of credit - t earns interest_income on the unpaid balance of any line of credit extended in connection with the visa credit cards the terms and conditions pertaining to the credit cards including the interest rate charged are set forth in the cardholder agreement executed between t and each approved member t also receives income from certain fees and service charges as provided in the cardholder agreement including cash advance fees late penalty payment fees over limit fees and card or personal identification_number pin replacement fees although the name of the credit_union and visa logo are conspicuously present on the face of the plastic card only t bears any loss from a member's default on his or her obligation merchant assessments - by reason of its membership in visa and its active role in the marketing and issuance of visa brand credit cards t derives revenue from fees charged to retail businesses participating in the visa payment system visa processes the series of transactions that begin when a cardholder makes a purchase of goods or services using a visa brand credit card however a credit card transaction cannot be consummated if the retail business at which the transaction cycle begins is unwilling to accept them in order to foster card issuance and usage visa and its member institutions have developed and implemented visa net’ an advanced network that acts as an authorization service for visa card transactions as well as a clearing and settlement service to transfer payment information between parties technological developments marketing and other factors have encouraged retail businesses including supermarkets restaurants chain retailers and hundreds of thousands of other vendors and merchants collectively referred to as the merchants to accept visa cards as a payment option every transaction using a visa card incurs costs including but not limited to the point of sale pos terminal s provided to merchants that facilitate the transactions the visa network transmission lines and software that link the transaction authorization and related sales data between the merchants and visa and the expense associated with the credit union's agent which may also be a member of visa that processes the transaction and converts it to statement form for the multiple parties involved each merchant that accepts visa cards as a payment option must contractually agree ie the merchant agreement’ to pay a fee related to the transaction processing costs of visa card payments the fees assessed against merchants otherwise known in the industry as ‘interchange income may vary by card product processing technology and merchant category but are generally based on a percentage of net sales plus a fixed transaction fee interchange income is generated from a payment system that operates every day of the year on a continuous basis the interchange income derived by visa is apportioned among the members that issue payment cards in accordance with a revenue sharing arrangement that credits a member's settlement account for that portion of interchange income attributable to its cardholders’ purchases accordingly t derives interchange income based on the consumer purchases made by its own members using the visa credit card the payment of interest charges and related service fees by a member of t pursuant to the cardholder agreement is not contingent on although it may be derived from credit card purchases this is evidenced by the fact that a member may incur credit card debt for instance by borrowing through cash advances without generating interchange income likewise a member may use his or her card to purchase goods or services which generate interchange income to t without incurring interest charges this is demonstrated by a member who pays the current month's charges in full thereby maintaining a zero balance card both the interchange program and cardholder loan program incur a variety of expenses directly related to the type of income that each business produces due to the size and complexity of the credit card program t contracts directly and indirectly through v with an outside vendor that is able to capture and process data related to the interchange program from access to the visa network that records credit card purchases and the cardholder program from information furnished by t the processing vendor vendor’ maintains a separate settlement account to record the interchange income and related expenses pertaining to t as well as the expenses attributable to the cardholder program t receives a statement from the vendor on a monthly basis that details the amount of interchange income credited to its account and the itemized charges related to both the interchange and cardholder programs expenses charged to t in connection with the interchange program include authorization fees transaction processing fees and marketing fees including scoreboard redemption fees expenses_incurred and charged by the vendor to administer certain functions of t's cardholder loan program include statement and notice fees security fees and pass-thru postage and delivery fees other expenses such as card issuance file residency maintenance and inquiry appear to be allocable to both the interchange and cardholder programs additional fees royalties and assessments may be charged to t directly by visa or indirectly through the vendor as they pertain to one or both programs t offer also offers its members a visa checkcard which can be utilized as in order to use a checkcard a member must either a debit card or a pos card open and maintain a sharedraft account a sharedraft account is analogous to a checking account at a bank the checkcard offers t’s members the convenience of withdrawing funds or purchasing goods or services without writing a manual sharedraft equivalent to a check a member may use the checkcard as a debit card to withdraw funds at an atm or to make purchases by keying in a personal identification_number or pin alternatively the member may use the checkcard as a signature required pos card the checkcard effectively taps into the visa network lines similar to a credit card except that it authorizes the transfer of funds from the member's sharedraft account there is generally no credit line extended in connection with the use of the checkcard since the member is expected to have sufficient funds in his or her account similar to its credit card program t derives interchange income fromits visa checkcard program by virtue of its membership in visa and the services that it performs on behalf of visa in the marketing and issuance of its products the rate of checkcard interchange income is also determined by visa's contractual arrangement with its participating merchants and may also vary based on the card product processing technology and category of merchant according to t the credit_union uses the vendor to process its check card transactions interchange income and expenses directly connected with interchange income are reported by the vendor on a monthly settlement account statement t maintains separate general ledger accounts to record the interest_income and interchange income derived from credit card and checkcard -- ------- - transactions during each tax_year under examination t derived gross _ interchange income in excess of dollar_figure c nonmember aim fees both the atm cards and checkcards enable t’s members to access cash from their sharedraft and or savings account s on a hour a day basis members may withdraw funds at any of the thousands of atm's that are linked to nyce or other financial networks t charges its members for atm transactions conducted at foreign machines the institution that owns the atm may also impose a surcharge alternatively t’s members may access their cash free of charge and perform other transactions at atm’s owned by the credit_union t operates one or more proprietary atm’s as a service to its members however nonmembers can also withdraw funds at t’s atm's since they are accessible by the general_public on a 24-hour a day basis each atm can distinguish between a t issued atm or check card and a card issued by another credit_union or other financial_institution by the information coded on the magnetic strip embedded in the back of the card in accordance with state and or federal_law nonmembers are advised by an atm notice just prior to the execution of the transaction that they will be subject_to the fee imposed by t the notice effectively allows the nonmember the choice to continue and accept the surcharge or cancel the transaction without incurring a fee transaction details indicate that the atm’s are used by nonmembers on a regular and continuous basis t derived nonmember atm fees in excess of dollar_figure calendar tax_year under examination revenue derived from nonmember atm transactions is used in part to offset the expenses_incurred to operate the atm program and or to support other member programs during the law sec_501 of the internal_revenue_code ‘cade’ provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 of the code specifically exempts from federal_income_tax credit unions without capital stock organized and operated for mutual purposes and without profit sec_1_501_c_14_-1 of the income_tax regulations regulations provides in part that credit unions other than federal credit unions described in sec_501 of the code without capital stock organized and operated for mutual purposes and without profit are exempt from tax under sec_501 state-chartered credit unions were first acknowledged as exempt from federal_income_tax in a opinion of the attorney_general the attorney_general considered credit unions organized under the laws of the commonwealth of massachusetts the attorney general's opinion described the purposes of credit unions existing at that time i t is apparent that the purpose of these financial associations is to help people save and to assist those in need of financial help whose credit may not be established at the larger banks in reality they are fundamentally similar and supplemental to the existing agencies for promoting thrift namely the savings banks and cooperative banks except on a much smaller scale the attorney general's opinion also described some of the operations of credit unions--making loans in appropriate amounts to members on which a low rate of interest is charged and that pjrompt payment of obligations is a fundamental requirement the opinion described in detail the procedures by which members’ savings were held by the credit_union and how the members earned interest on their deposits the opinion also pointed to the democratic character of the governance of these early credit unions by their members at the annual meeting of the association each member shareholder and depositor has but one vote after review of the features and operations of these early massachusetts credit unions the attorney general's opinion held that state-chartered credit unions would be exempt from federal_income_tax see u s op atty gen the legal analysis of the attorney general's opinion was adopted in treasury regulations issued in and this remained the official basis for the tax exempt status of state-chartered credit unions until the revenue act of granted express statutory tax-exempt status to state-chartered credit unions however the revenue act of removed tax exemption from savings and loan associations cooperative banks and mutual_savings_banks the legislative_history of the act suggests that the reason these entities lost their exemption was because of their increasing similarity to commercial banks and the resulting loss of their original characteristic of mutuality specifically referring to the early days of these institutions the legislative_history states the fact that the members were both the borrowers and the lenders was the essence of the mutuality of these organizations see generally s rep no date reprinted in u s code cong ad svc present-day sec_501 - as enacted in - incorporates the requirements of mutuality and non-profit operation which formed the basis for the attorney general's recognition of credit unions’ tax-exempt status in accordingly the basic purposes of the credit_union tax exemption remain essentially the same today as they were in based on the attorney general's opinion the basis for exemption is the provision of savings accounts and loans to members who may not be served by banks in a non-profit and mutual manner sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 sec_512 of the code provides that the term unrelated_business_taxable_income means with certain modifications the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_513 of the code defines the term unrelated_trade_or_business in the case of any organization subject_to tax imposed by sec_511 as any trade - or business the conduct of which is not substantially related aside from the need of such organization for the income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_1_513-1 of the regulations provides that gross_income ofan exempt_organization subject_to the tax imposed by sec_511 of the code is with certain exceptions includable in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the term trade_or_business has the same meaning it has in sec_162 of the code and generally includes any activity carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that in determining whether a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued hence for example specific business activities will ordinarily be deemed regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that gross_income is derived from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities that generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a strong one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those exempt purposes whether activities contribute importantly to an organization's exempt purposes depends in each case upon the facts and circumstances invoived in 693_f2d_525 5th cir a business league described in sec_501 of the code engaged in several activities including the endorsement of insurance to its members the court analyzed whether these activities were substantially related to the business league's exempt_purpose under sec_501 of advancing the credit_union movement in order to determine whether income generated from those activities resulted in unrelated_business_income to the business league in its analysis the court stated that the substantial relationship’ determination is necessarily a fact- based inquiry id pincite the court also noted that the regulations under sec_513 require a case-by-case identification of the exempt_purpose an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted the league promoted the purchase of insurance policies from a particular carrier providing the carrier with convenient services in the marketing and administration of its programs the court stated that the league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue the court also discussed at length the distinction between group and individual benefit the court said the distinction’ between inherently group benefits and individual benefits is analogous to the aggregate entity concept familiar in partnership_taxation _ his separate just as a member of a partnership may enjoy benefits in capacities as partner and non-partner so may a member of the league may enjoy benefits both as a league member and as an individual credit only those activities that benefit the credit unions in their capacities union the be considered as league members can this group benefit standard also accords with league’s exempt_function the requirement that a business league seek to improve the conditions of an entire line_of_business rather than perform discrete services for individuals see sec_1_501_c_6_-1 when the activities of a business league are directed toward the achievement of the common business its members are interest of inherently group benefits benefits that accrue to its members the substantially related to id pincite the court continued its analysis by stating that insurance endorsement and administration is not the sort of unique activity that satisfies the substantial relationship_test nor is its benefits group-related id pincite rather than merely advising members of the availability and desirability of insurance coverage to credit unions generally the league promoted the purchase of polices from a particular carrier the court affirmed the district court’s rationale that the league’s insurance activities did little more than generate revenue because the league’s endorsement was basically a fundraising activity it was by definition - unrelated business activity under sec_513 id pincite therefore the court concluded that the league’s insurance activities were not substantially related to its tax-exempt purpose of advancing the credit_union movement rather the connection between the furtherance of the credit_union movement and the selling of insurance was at best tangential in 78_tc_246 aff'd 726_f2d_1097 6th cir the court held that promotional and administrative fees and an experience rating reserve refund received by a business league described in sec_501 of the code for promoting group_insurance programs for its members constituted unrelated_business_taxable_income under sec_512 in holding that the business league’s activities were not substantially related the court considered whether the league's insurance activities contributed importantly to the league’s exempt_purpose of advancing the common business interests of independent insurance agents the court stated the burden is on the taxpayer to show that the challenged activities contribute directly and importantly to the improvement of conditions in a particular line_of_business the court noted that the petitioner's insurance activities did little more than generate revenue for the association and provided members with a convenient and economical service in the operation of their agencies as such they stood in sharp contrast to petitioner's educational and legislative activities which served the broader purpose of improving the general business environment in which insurance agents operated thus the court found petitioner's activity of promoting insurance was not substantially related to its exempt_purpose in la caisse popu563_f2d_505 1st cir the government unsuccessfully challenged the exempt status under sec_501 of the code of an organization chartered as a credit_union by the state of new hampshire the government maintained that the organization was not exempt because it offered a wide variety of services typically offered by nonexempt full service banks and was therefore not organized or operated as a credit_union among these services were checking accounts mortgage loans banking by mail safe deposit boxes and a night depository this case focused solely on the taxpayer's exemption under sec_501 and did not address the provisions of sec_511 through in 646_fsupp_1199 n d ala a credit_union described in sec_501 of the code offered cancer and group_life_insurance to its individual members the issue was whether commissions the credit_union received from servicing these particular types of insurance policies constituted unrelated_business_income under sec_512 the court did not reach the issue for jurisdictional reasons however it stated in a footnote that the petitioner would have lost on the merits of this issue because the policies benefited the insured without any reference to the member's loans or accounts with the credit_union that court stated in dicta that cancer and group_life_insurance offered by a credit_union to its members would result in unrelated business table income for the following reasons petitioner earned commissions for servicing cancer and group_life_insurance policies these policies were for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union petitioner derived no benefit from the policies other than commission on the sale of said policies earned from the insurance_companies which issued the policies the sale of the cancer and group_life_insurance policies referred to had no substantial causal relationship to petitioner's exempt purposes and the sale of the policies bore no relationship to petitioner's function as a credit_union id pincite n revrul_69_282 1969_1_cb_155 provides that an organization must be formed and operated under the state law governing the formation of credit unions to qualify for exemption under sec_501 of the code as a state- chartered credit_union revrul_72_37 1972_1_cb_152 provides that to qualify as a credit_union_exempt from income_tax under sec_501 a of the code an organization must in addition to being formed and operated under a state credit_union law operate without profit and for the mutual benefit of its members the revenue_ruling clarified revrul_69_282 stating that a state charter is a threshold requirement for exemption but not the sole requirement revrul_60_228 1960_1_cb_200 interprets the substantially related requirement of sec_513 an organization exempt from federal_income_tax as an agricultural_organization described in sec_501 of the code promoted wider insurance coverage among its members and other local farmers including life casualty and fire insurance the insurance programs are provided by several insurance_companies but the organization's administrative and secretarial staff is assigned to the work the organization receives an overall fee from the insurance_company for office and other services rendered them in connection with the insurance programs the revenue_ruling provides that a trade_or_business is substantially related to an organization’s exempt_activities if the principal purpose of the trade_or_business furthers these exempt purposes however in this case such activities are not usually associated with the functions of an agricultural_organization and normally would not be carried on by such an organization in furtherance of its exempt purposes therefore these activities are not substantially related to the organization’s exempt purposes thus the income resulting from these activities is subject_to tax under sec_511 analysis in determining whether an income-producing activity is an unrelated_trade_or_business it is necessary to show that there is a trade_or_business the trade_or_business is regularly carried on and the conduct of the trade_or_business is not substantially related to the organization's exempt_purpose or function see sec_1_513-1 a of the regulations t has agreed that the activities at issue are trade_or_business that is regularly carried on therefore the sole issue is whether each activity is substantially related to the organization's achievement of its exempt purposes gross_income is derived from an unrelated_trade_or_business if the conduct of the trade_or_business is not substantially related other than through production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations determination of the substantial relationship issue requires an examination of the relationship between the business activities which generate the particular income in question and the accomplishment of the organization’s exempt purposes id the regulations further state that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations see also prof'lins agents of michigan supra insurance activity was not substantially related because activity did little more than generate revenue and provide members with a service and did not further taxpayer's exempt_purpose of improving business conditions and louisiana credit_union league supra league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue and at best was only tangentially related to the furtherance of the league’s exempt_purpose of improving business conditions of one or more lines of business the court found the requisite substantial relationship lacking for t’s activities to escape taxation as unrelated_business_income the activities must contribute directly and importantly to the accomplishment of one or more of t's exempt purposes-promotion of thrift and providing low cost credit for its members through mutual and nonprofit operation sec_1_513-1 of the regulations see also prof'l ins agents of michigan supra we address each of the activities below insurance t argues that the sale of credit disability insurance is directly related to the credit union’s specific exempt purposes of fostering thrift among the members including both the extension of credit to members on reasonable terms and encouraging savings among the members and providing services to members on a mutual basis t further maintains that credit insurance which is an integral part of a member loan transaction is a mechanism for assuring the prompt repayment of debts in situations where the financial resources of the borrower and the borrower's family become strained as a result of disability in fact credit disability the facts do not show how sales of credit disability insurance contribute directly and importantly to accomplishing t’s exempt purposes credit disability insurance is not required for the approval of a loan insurance is not available to members on certain types of loans such as mortgage and other real_estate loans the member decides whether to purchase credit disability insurance based on his or her own assessment of whether the insurance will provide a benefit to that individual member the individual member benefits in that the member need not worry about paying a loan to t in the event of disability while there is also a benefit to the credit_union as the beneficiary the facts do not show how the sale of credit disability insurance otherwise contributes importantly and directly to accomplishing t's exempt purposes other than through the production_of_income availability of credit disability insurance does not encourage savings or assist t in offering low cost credit t does not take into consideration the need for this insurance by members t performs no studies to determine which members may need credit disability insurance and there is no required corresponding counseling to members who may have more need than others although t's staff may recommend insurance based on the level of personal and family resources these recommendations are not mandatory in specific cases and coverage is not required in these cases applying the factors of alabama central credit_union supra t earns commissions for providing credit disability insurance sells policies for the express benefit of the insured albeit with reference to a member's loan with the credit_union derives some benefit from the credit disability insurance but the primary benefit is production_of_income both through the commission on the sale of the insurance earned and the bonuses paid to t employees the insurance referred to has no substantial causal relationship to t’s exempt purposes and the insurance bears no relationship to t's function as a credit_union looking at the facts with respect to credit disability insurance the sale of credit disability insurance is not substantially related to t's exempt purposes the available information indicates that the sale of insurance is primarily for the purpose of generating income to t and some of its employees and for the benefit of the insured rather than for the benefit of t's membership based on all of the facts and circumstances t’s activities with respect to the sale of credit disability insurance do not contribute importantly to accomplishing t’s exempt purposes therefore the sale of credit disability insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit t argues that making ad d and other types of insurance available to members is substantially related to the credit union’s exempt_purpose of promoting thrift by providing basic financial protection to members on a mutual basis t also argues that these insurances facilitate prompt repayment of loans on a mutual basis by protecting the individual member's financial security the facts do not show how t’s sales of these insurances contribute directly and importantly to t’s exempt purposes t has not demonstrated that sales of insurance encourage savings by members who purchase it provided information showing that the sale of insurance aids a member in obtaining credit or reduces the cost of providing credit to members the facts do not demonstrate that the sale of insurance to individual members advances t's mutual operation insurance provides a financial protection to an individual the individual’s purchase of insurance does not provide a benefit to the members as a whole the legislative_history of sec_501 of the code indicates that mutuality is tied to the same members being the borrowers and lenders in loan transactions rather than the general principles that t espouses s rep no date t has also not t has not stated how the sale of insurance to an individual provides a mutual benefit to t’s members the facts also do not show how sale of insurance benefits the members of the credit_union as a whole a member may if a member of t purchase insurance without obtaining credit or a loan from t receives accidental dismemberment insurance payments the member may use the insurance payments as he or she wishes rather than saving them or paying in the case of accidental death the member's beneficiary off an obligation to t may or may not be a member of t and also may use the payments as he or she desires in alabama central credit_union supra the court stated in dicta several in this case t factors cited above relevant to the substantially related inquiry earns commissions for servicing ad d insurance policies sells policies for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union derives no benefit from the policies other than commission on the sale of the policies earned from the insurance_companies which issued the policies the sale of the insurance policies referred to has no substantial causal relationship to t’s exempt purposes and the sale of the policies bears no relationship to t’s function as a credit_union based on all of the facts and circumstances t's activities with respect to the sale of insurance do not contribute importantly to accomplishing t’s exempt purposes the insurance sold benefits an individual and t receives no benefit other than the production_of_income therefore the sale of insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to unrelated_business_income_tax ubit interchange income derived in connection with t's visa credit card and checkeard program making interest-bearing loans to members is a traditional activity of exempt credit unions_credit unions originally made unsecured personal loans to members because of changes in the financial marketplace and the expanded needs of financial_institution customers today all the types of loans made by t - including personal loans to members first mortgage loans and second-mortgage or home equity loans secured_by residential real_estate owned by the member small_business loans auto loans secured_by the automobile owned by the member whose purchase is financed by the loan and credit card loans - are recognized as substantially related to the exempt purposes and functions of t similarly activities attendant on these loan programs are also substantially related to t’s thrift-encouragement and mutual member service purposes credit card loans are extended to members as a component of the overall credit card program and ultimately the member lending program as a whole maintained by t accordingly the credit card program is substantially related to t’s exempt purposes therefore any net_income after deduction of related expenses arising from the card program specifically including but not limited to the interchange fees generated by merchant purchases is not subject_to unrelated_business_income_tax evolution and change in the financial marketplace over the decades govern the analysis of the other activities as well debit cards and atms are contemporary account access technologies which are provided in the context of a program with a number of features the debit card and atm programs as a whole are financial services that are substantially related to t's exempt purposes as a financial_institution devoted to member service on a mutual and nonprofit basis any net_income from those overall programs interchange fees in the case of debit cards and fees from member use of t’s terminals in the case of atms is accordingly not subject_to unrelated_business_income_tax nonmember use of t's atm's t argues that atm fee revenue received from nonmembers is irrelevant so long as the trade_or_business activity itself is substantially related to the tax- exempt_purpose t argues that providing full service reciprocally accessible networked atms is substantially related to the credit union’s exempt purposes so all revenue derived from that activity including nonmember fees is exempt from ubit t also argues that many of its members are also customers of other unrelated financial institutions and have such financial institution’s atm card member of t uses t's atm it would be recorded by t as a nonmember transaction from the other financial_institution ifa the facts do not show how fees charged to nonmember atm users contribute directly and importantly to accomplishing t’s exempt purposes the nonmember benefits in that he or she can access an atm while there is also a benefit to the individual members by allowing them to use the atms of other financial institutions the facts do not show how the nonmember atm fees contributes importantly and directly to accomplishing t's exempt purposes other than through the production_of_income availability of atms by nonmembers does not encourage savings or assist t in offering low cost credit t can easily avoid the result that transactions by members using cards from other institutions in t’s atms would be recorded as a nonmember transaction by asking its members to use only cards issued by t in t’s atms applying the factors of alabama central credit_union supra t earns revenue for providing nonmembers access to its atms derives little benefit from nonmember use at its atms charging fees for nonmember use at t's atms has no substantial causal relationship to t’s exempt purposes the nonmember atm usage referred to has no substantial causal relationship to t's exempt purposes and the nonmember atm usage bears no relationship to t’s function as a credit_union looking at the facts with respect to nonmember atm fees such fees are not substantially related to t’s exempt purposes the available information indicates that the fees generated from nonmember usage are primarily for the purpose of generating income to t and for the benefit of the nonmember user rather than for the benefit of t's membership based on all of the facts and circumstances t’s activities with respect to the nonmember atm fees do not contribute importantly to accomplishing t’s exempt purposes therefore the nonmember atm fees are not substantially related to t's exempt purposes and amounts received therefrom are subject_to ubit conclusions for reasons set forth above we conclude that the income received by a sec_501 credit_union from the activities listed below are not substantially related to the furtherance of t’s exempt purposes and therefore are subject_to ubit a b sale of insurance products nonmember atm fees interchange income derived by t in connection with its visa credit card and checkcard program is substantially related to the performance of t's exempt_function and therefore does not constitute unrelated_business_income subject_to the tax imposed by sec_511 of the code a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


office of c h i ef counsel department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date cc pa apjp b01 ------------------- -conex-105536-06 number info release date uil -------------------------------- --------------------------------------------------------------- ------------------------------------------- ------------------------------------------ dear ----------- this letter responds to your letter addressed to commissioner mark everson and others dated date written on behalf of the society of professional benefit administrators and your enclosed previous submission under the industry issue resolution iir_program both address the information reporting requirements for medical payments under sec_6041 of the internal_revenue_code and regulations specifically you request that the internal_revenue_service service eliminate the information reporting requirements for medical payments or alternatively require reporting only for non-corporate recipients numbers tins reported on forms 1099-misc miscellaneous income and the tins of the medical payees reasons for the mismatch include accounting practices and some state laws require that checks be issued in the name of a medical department or specialty center but the tin of the entire hospital is used for reporting purposes in the era of frequent mergers and buyouts many medical e ntities do not have the correct tin of predecessor or successor entities and form 1099-misc reports payments on a payor payee basis but the medical industry tracks payments on a patient or per site basis in addition you suggest that the form 1099-misc covers only a fraction of the sources of payments to the medical payees you note that there are frequent mismatches between the tax identification sec_6041 requires in part that all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of salaries wages compensation remuneration emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year must provide a return setting forth the amount of the gains profits and income and the name and address of the recipient of the payment reporting for payments to a corporation except payments made after december sec_1_6041-3 of the income_tax regulations provides an exception to we understand that your iir recommendation was coordinated among various a hospital or extended care facility described in sec_501 which is exempt from taxation under a or a hospital or extended care facility owned and operated by the united_states a state the district of columbia a possession_of_the_united_states or a political_subdivision agency_or_instrumentality of any of the foregoing to a corporation engaged in providing medical and health care services or engaged in the billing and collecting of payments in respect to the providing of medical and health care services other than payments to -- offices of the service section dollar_figure of revproc_2003_36 2003_1_cb_859 states that a service representative will notify a submitter when a decision has been made whether to include an issue on the guidance priority list or on a periodic update while it appears that you may not have received an official written notification from the service concerning your recommendation ir-2005-81 irb lexis announces that your project was not selected for the iir_program taxpayers that may have taxable_income the current information reporting requirements under sec_6041 and the regulations require reporting to medical and health care service corporations and help identify medical payees that may have taxable_income we appreciate your comments and concerns regarding the information reporting requirements for medical payments and will consider them if you would like to discuss this further you may call -------------------------at --------------------- the purpose of information reporting is to enable the service to identify sincerely donna welch senior counsel administrative provisions judicial practice procedure administration