Bellco Credit Union v. U.S.
| Decision Date | 12 November 2009 |
| Docket Number | Civil Action No. 08-cv-01071-CMA-KMT |
| Citation | 735 F.Supp.2d 1268,104 A.F.T.R.2d 2009 |
| Parties | BELLCO CREDIT UNION, Plaintiff, v. The UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Colorado |
Michael M. Conway, Anna R. Downs-Temple, Foley & Lardner, LLP, Chicago, IL, Richard F. Riley, Jr., Foley & Lardner, LLP, Washington, DC, for Plaintiff.
Michael G. Pitman, Shayla Laura McCormally, Washington, DC, for Defendant.
This matter is before the Court on Plaintiff Bellco Credit Union's Motion for Summary Judgment (Doc. # 62) and the United States' Motion for Summary Judgment (Doc. # 69). For the following reasons, the motions are GRANTED in part and DENIED in part. While certain issues involve undisputed facts capable of resolution on summary judgment, other issues must await fuller exposition at trial.
Bellco is a credit union that, in addition to providing basic banking services, offers certain insurance and financial services products to its members. This case involves a dispute over whether the income earned from those products is taxable. As a tax-exempt organization, Bellco is liable only if all or part of this income qualifies as "unrelated business income" under the tax code. The code provides little guidance on precisely what is or is not "related," directing instead that the determination be made in light of all the facts and circumstances. Perhaps as a result of this standard, the parties have filed substantial cross-motions for summary judgment, debating the nature of the facts and the conclusions to be drawn therefrom. Both motions are fully briefed and ripe for decision.
Bellco is a Colorado state-chartered credit union, owned and governed by its members. (Doc. # 62 at 2, ¶ 1, and 4 ¶¶ 9-10; Doc. # 83 at 1 ¶ 1, and 2 ¶¶ 9-10). In Colorado, credit unions are cooperative associations that exist for the two-fold purpose of promoting thrift among their members and providing them a source of fair and reasonable credit. (Doc. # 62 at 4, ¶ 6; Doc. # 83 at 1, ¶ 6). See also Colo.Rev.Stat. § 11-30-101(1)(a). Credit unions also seek to promote financial literacy in their membership. (Doc. # 62 at 4, ¶ 7; Doc. # 83 at 2, ¶ 7).
As a state-chartered credit union, Bellco is generally exempt from federal income tax. (Doc. # 69 at 3, ¶ 1; Doc. # 81 at 4, ¶ 1). See also 26 U.S.C. § 501(c)(14)(A). However, like most exempt organizations, Bellco is subject to the so-called "unrelated business income tax" ("UBIT"). This lawsuit involves several types of products offered by Bellco, the income from which the Government contends is taxable unrelated business income. Those products are: credit life and disability insurance; financial services products; and accidental death and dismemberment insurance.
As is obvious from the name, UBIT applies only to income from "unrelated" business-that is, business not "substantially related" to Bellco's tax-exempt purpose. See 26 U.S.C. §§ 511-513. Bellco argues that two of the products-credit insurance and financial services-fit this "substantial relation" description and thus should not be taxed. Bellco's argument on the third product is different. The tax code expressly excludes "royalties" from the UBIT calculation. 26 U.S.C. § 512(b)(2). Bellco argues that income from AD & D insurance was "royalties,"and therefore also not taxable. The resolution of both issues depends on an evaluation of the relevant "facts and circumstances" surrounding each product. See 26 C.F.R. §§ 1.512(b)-1; 1.513-1(d)(2).1
When Bellco members took out a loan, they were offered the option to purchase credit life and credit disability insurance on that loan. Credit insurance provides protection in the event a borrower dies or becomes disabled while the loan is outstanding. (Doc. # 62 at 6, ¶ 20, and 8, ¶ 30; Doc. # 83 at 3, ¶ 20, and 5, ¶ 30). The rate Bellco charged its members for credit life insurance was the lowest in Colorado-39 cents per $1,000 of coverage, as compared with 58 cents per $1,000 that Colorado banks were allowed to charge for the same protection. (Doc. # 62 at 7, ¶ 27; Doc. # 83 at 5, ¶ 27). For the years at issue in this lawsuit, Bellco's average "loss ratio"-the amount collected in premiums as compared to the amount paid out in claims-was 30.3%, meaning that Bellco paid out $0.30 for every $1 collected. (Doc. # 69 at 8, ¶ 15; Doc. # 81 at 8, ¶ 15).
Bellco received credit insurance income from three specific sources. The majority of the income came from insurance sold on "direct" loans. (Doc. # 69 at 7, ¶ 10; Doc. # 81 at 6, ¶ 10). These loans were initiated by Bellco employees themselves and the insurance was provided by a company called Minnesota Life. ( Id.). The insurance premiums were so-called "declining balance" premiums, which meant that the required premium payment decreased as the loan balance declined. (Doc. # 62 at 7, ¶¶ 24-25; Doc. # 83 at 4-5, ¶¶ 24-25).
Bellco also sold credit insurance through an "indirect" lending program with automobile dealerships. The program was managed by a group called CUILA, which was formed by Bellco and numerous other credit unions and in which Bellco held approximately a one-third ownership stake.2 (Doc. # 69 at 10, ¶ 21; Doc. # 81 at 10, ¶ 21; see also Doc. # 67, Ex. I at 20:3-10.) Through this indirect lending program, dealership employees offered automobile purchasers financing options from over forty credit unions, including Bellco. (Doc. # 69 at 10, ¶¶ 21, 23; Doc. # 81 at 10, ¶¶ 21, 23). Although Bellco provided the initial parameters for the loans, the loan process, including the sale of products such as credit insurance, was conducted by dealership employees. (Doc. # 69 at 10, ¶ 23; Doc. # 81 at 10, ¶ 23). Unlike the direct loan insurance monthly declining premiums, indirect loan insurance was a "single premium" product, meaning that borrowers made one lump sum payment when the loan was initiated. (Doc. # 69 at 11, ¶ 24; Doc. # 81 at 10, ¶ 24). Bellco received a 4.5% commission on the loan insurance premiums paid for through the indirect lending program. ( Id.).
Finally, given its ownership interest in CUILA, Bellco was paid a share of CUILA's net income from its overall sales of credit insurance. (Doc. # 91 at 10, ¶ 26). CUILA's income included commissions paid for credit insurance policies sold toindividuals who were not Bellco members. ( Id.).
The second general product at issue is financial products and services. Bellco is not a licensed securities broker-dealer and is, therefore, legally prohibited from offering certain financial products and services to its members. (Doc. # 62 at 14-15, ¶¶ 65-68; Doc. # 83 at 12, ¶¶ 65-68; see also Doc. # 69 at 12, ¶ 29; Doc. # 81 at 10, ¶ 29). As a result, it partnered with CUSO Financial Services ("CFS"), a broker-dealer dedicated to providing financial services to credit unions. (Doc. # 62 at 14-15, ¶¶ 65-68; Doc. # 83 at 11, ¶¶ 65-68). Bellco had no direct involvement in the sale of these financial products and services, but instead permitted CFS representatives to set up in Bellco's major branches and referred Bellco members to those representatives when appropriate. (Doc. # 62 at 15, ¶ 70; Doc. # 83 at 12, ¶ 70; see also Doc. # 69 at 12, ¶ 29; Doc. # 81 at 10, ¶ 29). The representatives were not Bellco employees, but rather self-employed independent contractors supervised by CFS. (Doc. # 69 at 12, ¶ 28; Doc. # 81 at 10, ¶ 28).
CFS representatives offered Bellco members a wide range of financial products, such as stocks, bonds, mutual funds, and annuities. (Doc. # 62 at 14, ¶ 65; Doc. # 83 at 12, ¶ 65). Not only were these financial products made available to Bellco's members, but also, pursuant to the Bellco/CFS agreement, CFS representatives were allowed to offer products and services to non-members. (Doc. # 69 at 13, ¶ 31; Doc. # 81 at 10-11, ¶ 31). During the tax years in question, a relatively small percentage of the products sold-in the range of 10%-were sold to non-members. (Doc. # 91 at 11, ¶ 31). CFS also trained Bellco employees on how these financial products and services were a means for the credit union to achieve its goal of helping its members toward financial independence. (Doc. # 62 at 15, ¶ 71; Doc. # 83 at 12, ¶ 71). CFS representatives assisted Bellco members in financial planning, regardless of their investment potential, and invited Bellco members to an on-going series of free financial planning seminars. (Doc. # 62 at 15-16, ¶¶ 71, 73; Doc. # 83 at 12-13, ¶¶ 71, 73).
The majority of Bellco's financial services income came from commissions on CFS's sale of these financial products. Specifically, whenever a product was sold, the wholesaler of the product paid CFS a commission, 40-45% of which CFS distributed to Bellco. (Doc. # 69 at 13, ¶ 30; Doc. # 81 at 10, ¶ 30). As noted above, CFS sold to Bellco members and non-members; as a result, Bellco's income from these financial products and services includes commissions on sales to non-members. (Doc. # 69 at 13, ¶ 31; Doc. # 81 at 10-11, ¶ 31).
Bellco's financial services income also included its share of the profits of a company called Member Gateways. As characterized by the parties, Member Gateways was created by a conglomeration of credit unions, including Bellco, for the purposes of evaluating new products for members and creating economies of scale in the acquisition of those products. (Doc. # 69 at 13, ¶ 32; Doc. # 81 at 11, ¶ 32). Bellco had a 4% ownership interest in Member Gateways; Member Gateways in turn invested in CFS. ( Id.)
The final product at issue in this lawsuit is accidental death and dismemberment ("AD & D") insurance. Bellco, in conjunction with a third party, Affinion BenefitsGroup,3 offered AD & D to its members. (Doc. # 62 at 11, ¶ 44; Doc. # 69 at 14, ¶ 33). The...
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