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CHARITABLE SPLIT-DOLLAR - STILL DEAD

November 30, 2004

Smart people can convince themselves of the most amazing things when they really want to. Case in point: "charitable split-dollar" life insurance. Like many highly-marketed tax shelters that come to grief, these required the IRS to be willfully blind to their consequences. As usual, the IRS failed to cooperate.

The basic plan: Taxpayer buys a "split-dollar" life policy on his life, or that of his spouse (often through a life insurance trust). The taxpayer splits the policy benefit with a charity. The charity recovers any premiums it pays at the death of the insured. The insured gets the remainder of the death benefit.

The taxpayer contributes enough money to charity to cover the life insurance premiums. The charity is under "no obligation" (wink, wink) to pay the policy premiums - but it always does. The taxpayer gets to convert non-deductible life insurance premiums to deductible charitable contributions.

WHY IT NEVER WORKED

The Tax Court explained yesterday why this never worked in a case involving David Roark, a successful entrepreneur and philanthropist, and clearly a smart man. His financial advisor, a Mr. Pippinger of IDS-American Express, informed him of the plan and implemented it for him in 1998, when he made a $240,000 "donation" to the National Community Foundation (NCF).

For a charitable gift of $250 or more to be deductible, the donee must provide a written statement to the donee that no goods or services were provided in return for the gift. NCF provided such a letter to Mr. Roark. The IRS failed to accept the letter as valid. In his defense, Mr. Roark cited the NCF letter ans said he "had no idea" whether NCF would pay the premiums. The Tax Court didn't buy this Eddie Haskell-like innocence:

   We do not find this disavowal credible. The idea for 
   this deal, after all, came from Pippenger--his financial, 
   not his charitable, adviser. Roark had to have realized 
   that the intricacy of the plan, plus the fact that it was 
   being marketed so extensively by American Express, 
   suggested that as a practical matter NCF would of 
   course use money it got under such plans to pay for 
   insurance and not just add to its endowment.

In short, the Court found that there were goods or services provided for the gift, the receipt of which was not properly acknowledged, and the contribution failed the tax law's substantiation requirements and was therefore not allowable.

Congress has since explicitly outlawed charitable split-dollar plans, but the Roark case, and others that predate the Congressional action, show that charitable split-dollar was always too good to be true.

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