A federal appeals court decision supporting a federal law outlawing private deductions on so-called charitable split-dollar arrangements does not impose any liability on the insurers that wrote the policies, according to the American Council of Life Insurers.
The decision in Addis v. Commissioner, handed down July 8 by a panel of the 9th U.S. Circuit of Appeals, based in San Francisco, gave unequivocal backing to federal government efforts to shut down a potentially lucrative tax shelter called charitable split-dollar that high-end insurance brokers had used to sell high-volume insurance products that provided a benefit for certain charities as well as a tax deduction in excess of their investment to the individual beneficiaries.
The arrangements, which flourished in 1997 and 1998, were shut down through a provision added to legislation enacted in 1999.
The Senate report on the legislation justified the provision by characterizing “charitable split-dollar arrangements as an abuse of the charitable contribution deduction where, in substance, the charity receives a transfer of a partial interest in an insurance policy, for which no charitable contribution deduction is allowed.”
The decision was an important one for the government, which moved to shut down the loophole after determining that a number of wealthy citizens were seeking to use it to shelter their income.
In its opinion, the panel cited testimony by the insurance marketer who sold the policy to the petitioners “that this was the first case that we ever sold” involving the split-dollar concept. The president of the National Heritage Foundation, which had been a party to the arrangement, testified before the Tax Court that 600 to 700 of the 4,500 foundations created by taxpayers to establish a split-dollar with the National Heritage Foundation were based on similar arrangements.