Second Bill Introduced to Eliminate Charitable Split-Dollar Insurance

Second Bill Introduced to Eliminate Charitable Split-Dollar Insurance

News story posted in Legislative on 10 February 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

House Ways and Means Committee Chair Bill Archer and ranking Democrat, Charles Rangel have introduced a second bill designed to eliminate the use of charitable split-dollar life insurance.

PGDC SUMMARY:

House Ways and Means Committee Chair Bill Archer, R-Texas and ranking Democrat, Charles B. Rangel of New York have introduced H.R. 630. This Bill, if passed, will amend section 170 of the Internal Revenue Code of 1986 to specifically prohibit charitable split-dollar insurance. Specifically, the Bill will disallow an income tax charitable deduction for a contribution to charity, when the charity pays any premium on a life insurance, annuity, or endowment contract, in which the donor, any family member of the donor, or any other person designated by the donor receives any direct or indirect benefit. This provision shall apply to transfers made after February 8, 1999.

H.R. 630 will also impose an excise tax on the charity for making such premium payment in the amount of the premium payment and is effective on the date of enactment of this Bill. For premiums paid after February 8, 1999, the charity must file an annual return indicating, with respect to any premiums subject to the excise tax, the amount of such premiums, the name and taxpayer identification number of each beneficiary, and such other information as the Secretary may require.

POINTS TO PONDER:

If the bill passes, how will charitable organizations currently involved in such transactions "unwind" them?

How will the bill affect a charity's ability to purchase commercial annuity contracts to "reinsure" its charitable gift annuities? Clearly, a transfer to a charitable organization in exchange for a charitable gift annuity is a transfer to a Sec. 170(c) organization. Might charitable gift annuities be an inadvertent victim of "friendly fire?" No, the text accompanying the bill states specifically that charitable gift annuities are intended to be exempt from the statute.

With respect to charitable remainder trusts, will a trustee be able to purchase a commercial deferred annuity contract for investment purposes and to control the timing of trust income distributions, an issue the IRS is currently examining? The language of the bill does not appear to apply to Sec. 664 trusts; however, how will the Secretary supplement the enacted provision in the Treasury Regulations, other than the reporting requirements?

Please note, the full text of introductory statement from Rep. Archer and the full text of the proposed bill follow.

Also, for further reading, refer to "Charitable Reverse Split-Dollar: Bonanza or Booby Trap?" in Gift Planner's Digest.

FULL TEXT OF INTRODUCTORY STATEMENT FROM REP. ARCHER:

BACKGROUND

Today Congressman Rangel and I are introducing H.R. 630, legislation designed to stop the spread of an abusive scheme /1/ referred to as charitable split-dollar life insurance. Under this scheme, taxpayers transfer money to a charity, which the charity then uses to pay premiums for life insurance on the transferor or another person. The beneficiaries under the life insurance contract typically include members of the transferor's family (either directly or through a family trust or family partnership). Having passed the money through a charity, the transferor claims a charitable contribution deduction for money that is actually being used to benefit the transferor and his or her family. If the transferor or the transferor's family paid the premium directly, the payment would not be deductible. Although the charity eventually may get some of the benefit under the life insurance contract, it does not have unfettered use of the transferred funds.

We are concerned that this type of transaction represents an abuse of the charitable contribution deduction. We are also concerned that the charity often gets relatively little benefit from this type of scheme, and serves merely as a conduit or accommodation party, which we do not view as appropriate for an organization with tax-exempt status. While there is no basis under present law for allowing a charitable contribution deduction in these circumstances, we intend that the introduction of this bill stop the marketing of these transactions immediately.

Therefore, our bill clarifies present law by specifically denying a charitable contribution deduction for a transfer to a charity if the charity directly or indirectly pays or paid any premium on a life insurance, annuity or endowment contract in connection with the transfer, and any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other noncharitable person chosen by the transferor. In addition, the bill clarifies present law by specifically denying the deduction for a charitable contribution if, in connection with a transfer to the charity, there is an understanding or expectation that any person will directly or indirectly pay any premium on any such contract. Further, the bill imposes an excise tax on the charity, equal to the amount of the premiums paid by the charity. Finally, the bill requires a charity to report annually to the Internal Revenue Service the amount of premiums subject to this excise tax and information about the beneficiaries under the contract.

TECHNICAL EXPLANATION

DEDUCTION DENIAL

Specifically, the bill provides that no charitable contribution deduction is allowed for purposes of Federal tax, for a transfer to or for the use of an organization described in section 170(c) of the Internal Revenue Code, if in connection with the transfer (1) the organization directly or indirectly pays, or has previously paid, any premium on any "personal benefit contract" with respect to the transferor, or (2) there is an understanding or expectation that any person will directly or indirectly pay any premium on any "personal benefit contract" with respect to the transferor. It is intended that an organization be considered as indirectly paying premiums if, for example, another person pays premiums on its behalf.

A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other person (other than a section 170(c) organization) designated by the transferor. For example, such a beneficiary would include a trust having a direct or indirect beneficiary who is the transferor or any member of the transferor's family, and would include an entity that is controlled by the transferor or any member of the transferor's family. It is intended that a beneficiary under the contract include any beneficiary under any side agreement relating to the contract. If a transferor contributes a life insurance contract to a section 170(c) organization and designates one or more section 170(c) organizations as the sole beneficiaries under the contract, generally, it is not intended that the deduction denial rule under the bill apply. If, however, there is an outstanding loan under the contract upon the transfer of the contract, then the transferor is considered as a beneficiary. The fact that a contract also has other direct or indirect beneficiaries (persons who are not the transferor or a family member, or designated by the transferor) does not prevent it from being a personal benefit contract. The bill is not intended to affect situations in which an organization pays premiums under a legitimate fringe benefit plan for employees.

It is intended that a person be considered as an indirect beneficiary under a contract if, for example, the person receives or will receive any economic benefit as a result of amounts paid under or with respect to the contract. For this purpose, an indirect beneficiary is not intended to include a person that benefits exclusively under a bona fide charitable gift annuity (within the meaning of sec. 501(m) (or a bona fide reinsurance arrangement with respect to such a charitable gift annuity)). Because we understand that a charitable gift annuity ordinarily does not involve a contract issued by an insurance company, the bill does not provide for special treatment of charitable gift annuities.

EXCISE TAX

The bill imposes on any organization described in section 170(c) of the Code an excise tax, in the amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract, if the payment of premiums on the contract is in connection with a transfer for which a deduction is not allowable under the deduction denial rule of the provision. The excise tax does apply if all of the direct and indirect beneficiaries under the contract (including any related side agreement) are organizations described in section 170(c). Under the bill, payments are treated as made by the organization, if they are made by any other person pursuant to an understanding or expectation of payment.

REPORTING

The bill requires that the organization annually report the amount of premiums that is paid during the year and that is subject to the excise tax imposed under the provision, and the name and taxpayer identification number of each beneficiary under the contract to which the premiums relate, as well as other information required by the Secretary of the Treasury. For this purpose, it is intended that a beneficiary include the beneficiary under any side agreement to which the section 170(c) organization is a party (or of which it is otherwise aware). Penalties applicable to returns required under Code section 6033 apply to returns under this reporting requirement. Returns required under this provision are to be furnished at such time and in such manner as the Secretary shall by forms or regulation require.

REGULATIONS

The bill provides for the promulgation of regulations necessary to carry out the purposes of the provisions.

EFFECTIVE DATE

The deduction denial provision of the bill applies to transfers after February 8, 1999. The excise tax provision of the bill applies to premiums paid after the date of enactment. The reporting provision applies to premiums (that would be subject to the excise tax were it then effective) paid after February 8, 1999.

No inference is intended that a charitable contribution deduction is allowed under present law in the circumstances to which this bill applies. The bill does not change the rules with respect to fraud or criminal or civil penalties under present law; thus, actions constituting fraud or that are subject to penalties under present law would still constitute fraud or be subject to the penalties after enactment of the bill.

FOOTNOTE

/1/ "A Popular Tax Shelter for 'Angry Affluent' Prompts Ire of Others," Wall Street Journal, Jan. 22, 1999, p. A1; "U.S. Treasury Officials Investigating Charitable Split-Dollar Insurance Plan," Wall Street Journal, Jan. 29, 1999, p. B5; "Brilliant Deduction?," The Chronicle of Philanthropy, Aug. 13, 1998, p. 24; "Charitable Reverse Split-Dollar: Bonanza or Booby Trap," Journal of Gift Planning, 2nd quarter 1998.

FULL TEXT OF H.R. 630:

106th CONGRESS 1st SESSION

H.R. 630

IN THE HOUSE OF REPRESENTATIVES

Mr. Archer (for himself and Mr. Rangel) introduced the following bill; which was referred to the Committee on ______.

A BILL

To amend the Internal Revenue Code of 1986 to reiterate the denial of the charitable contribution deduction for transfers associated with split-dollar insurance arrangements.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. CHARITABLE SPLIT-DOLLAR LIFE INSURANCE, ANNUITY, AND ENDOWMENT CONTRACTS.

(a) IN GENERAL. -- Subsection (f) of section 170 of the Internal Revenue Code of 1986 (relating to disallowance of deduction in certain cases and special rules) is amended by adding at the end the following new paragraph:

"(10) SPLIT-DOLLAR LIFE INSURANCE, ANNUITY, AND ENDOWMENT CONTRACTS. --

"(A) IN GENERAL. -- Nothing in this section or in section 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 shall be construed to allow a deduction, and no deduction shall be allowed, for any transfer to or for the use of an organization described in subsection (c) if in connection with such transfer --

"(i) the organization directly or indirectly pays, or has previously paid, any premium on any personal benefit contract with respect to the transferor, or

"(ii) there is an understanding or expectation that any person will directly or indirectly pay any premium on any personal benefit contract with respect to the transferor.

"(B) PERSONAL BENEFIT CONTRACT. -- For purposes of subparagraph (A), the term 'personal benefit contract' means, with respect to the transferor, any life insurance, annuity, or endowment contract if any direct or indirect beneficiary under such contract is the transferor, any member of the transferor's family, or any other person (other than an organization described in subsection (c)) designated by the transferor.

"(C) EXCISE TAX ON PREMIUMS PAID. --

"(i) IN GENERAL. -- There is hereby imposed on any organization described in subsection (c) an excise tax equal to the premiums paid by such organization on any life insurance, annuity, or endowment contract if the payment of premiums on such contract is in connection with a transfer for which a deduction is not allowable under subparagraph (A).

"(ii) PAYMENTS BY OTHER PERSONS. -- For purposes of clause (i), payments made by any other person pursuant to an understanding or expectation referred to in subparagraph (A) shall be treated as made by the organization.

"(iii) REPORTING. -- Any organization on which tax is imposed by clause (i) with respect to any premium shall file an annual return which includes --

"(I) the amount of such premiums paid during the year and the name and TIN of each beneficiary under the contract to which the premium relates, and

"(II) such other information as the Secretary may require.

The penalties applicable to returns required under section 6033 shall apply to returns required under this clause. Returns required under this clause shall be furnished at such time and in such manner as the Secretary shall by forms or regulations require.

"(D) REGULATIONS. -- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this paragraph."

(b) EFFECTIVE DATE. --

(1) IN GENERAL. -- Except as otherwise provided in this subsection, the amendment made by this section shall apply to transfers made after February 8, 1999.

(2) EXCISE TAX. -- Except as provided in paragraph (3) of this subsection, section 170(f)(10)(C) of the Internal Revenue Code of 1986 (as added by this section) shall apply to premiums paid after the date of the enactment of this Act.

(3) REPORTING. -- Clause (iii) of such section 170(f)(10)(C) shall apply to premiums paid after February 8, 1999 (determined as if the tax imposed by such section applies to premiums paid after such date).
__________________________

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