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Four recent developments in the charitable field are examined this month. In Addis v. Commissioner [374 F.3d 881 (9th Cir. 2004), cert den., 2005 WL 406098 (February 22, 2005)], taxpayers were not allowed an income tax charitable deduction for contributions used for charitable split-dollar life insurance. This is the first appellate court decision that has considered the viability of a charitable split-dollar insurance arrangement entered into prior to the elimination of its effectiveness, first by Notice 99-36, 1991-1 C.B. 1284 (June 15, 1999) and then by the addition of Section 170(f)(10) to the code in December 1999 (applying to transfers made after February 8, 1999).
Mr. and Mrs. Addis formed the Charles H. Addis Trust in 1997. The Addises also established a fund within NHF, a nonprofit organization, called the Addis Family Foundation. The Addises informed NHF that the trust intended to buy an insurance policy on the life of Mrs. Addis and would grant NHF an option to acquire an interest in that policy. The life insurance policy had a $40,000 annual premium. NHF and the trust entered into an agreement under which the Addises agreed to pay $4,000 of the insurance premium and NHF would pay the remaining $36,000. NHF then would be entitled to a death benefit of $557,280, which was approximately 56 percent of the initial death benefit.
Subsequently, the Addises sent a check to NHF for $36,000. The accompanying letter stated that NHF was not required to use the payment to pay the insurance premium. However, the facts indicated that NHF was nonetheless expected to do that. NHF credited the payment to the Addis Family Foundation and simultaneously debited the account $36,000 to pay NHF's portion of the life insurance premium. NHF sent the Addises a receipt for the $36,000 contribution, which stated that NHF did not provide any goods or services to the donor in return for the contribution. Approximately one year later, the transaction was repeated.
The Addises claimed the transfers of cash to NHF as charitable contributions on their income tax returns. The IRS argued that the Addises were not entitled to a charitable income tax deduction because they received a benefit from NHF. The IRS further argued that the Addises had not complied with the...