Investment Product Income from Nonmembers Taxable

Income from investment products, such as stocks, bonds, mutual funds and annuities, sold to nonmembers by a state-chartered credit union is subject to unrelated business income tax (UBIT), a federal court ruled last week.

“The sale of products to persons who are not members of a credit union at all cannot be considered substantially related to Bellco’s tax-exempt purpose,” Judge Christine Arguello wrote in Bellco Credit Union v. United States.

The credit union argued that income earned from nonmember sales was de minimis and thus should not be taxed. The judge wrote that the credit union did not provide any evidence from "case law to suggest income unrelated to its purpose, no matter how minor, can be shielded from UBIT."

So, if income from the sell of investment products is subject to UBIT, this would suggest that other income from nonmembers should be taxable, including income from loan participations to nonmembers, ATM surcharges, and wire transfer and check cashing services.

However, Arguello ruled that investment products made available to members were "substantially related" to Bellco's tax-exempt purposes, and therefore income from those activities is exempt from UBIT. She also deferred ruling on the treatment of Bellco's income from certain insurance products until the trial begins Dec. 7, and she suggested the trial address whether the sale of such products to nonmembers who belong to other credit unions qualifies for a UBIT exemption.