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IRS Looks At Charity Interests In Life Insurance Policies

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The Internal Revenue Service is setting up a system for monitoring the charity-owned life insurance market.

Section 1211 of the Pension Protection Act of 2006 requires the IRS to gather data on CHOLI transactions completed between Aug. 17, 2006, and Aug. 17, 2008, Stephen Coleman, an IRS official, writes in IRS Notice 2007-24.

In 2009, the IRS must report to the Senate Finance Committee and the House Ways and Means Committee about whether CHOLI arrangements “are consistent with the tax-exempt status of certain applicable exempt organizations,” Coleman writes. “The study may address whether such arrangements are or may be used to improperly shelter income from tax.”

To gather data on CHOLI transactions, the IRS has developed drafts of 2 forms: Form 8921, Transactions Involving a Pool of Applicable Insurance Contracts, and Form 8922, Applicable Insurance Contract Information Return (for Tax-Exempt Organizations and Government Entities under Section 6050V).

The organizations that must fill out Form 8922 will include a wide variety of tax-exempt organizations, such as religious, charitable, scientific and literary groups. Affected organizations also could include cemeteries, employee stock ownership plans, and governmental organizations, such as Indian tribal governments.

The tax-exempt organizations must report on any acquisition of a direct or indirect interest in an “applicable insurance contract in any case in which the acquisition is part of a structured transaction involving a pool of such contracts,” Coleman writes.

An “applicable insurance contract” is a life insurance, annuity or endowment contract in which a tax-exempt organization and some other person both have an interest.

The reporting requirement does not affect persons named as contract beneficiaries or, in some cases, as trust beneficiaries or trustees, Coleman writes.

On Form 8921, the tax-exempt organization will assign a “structured transaction identifier” to each transaction and provide a description of the allocation formulas, interest rates and other terms that govern the arrangement.

On Form 8922, the organization will describe the underlying insurance contracts, including information about the contract issuers and the insureds.

The IRS is asking for comments about the forms and comments about CHOLI transactions. Comments on the draft forms are due March 16, and comments on the CHOLI study are due Aug. 22.

A copy of the CHOLI notice is on the Web at Document Link.


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