Addis v. Comm'r of Internal Revenue, 6628–00.
| Decision Date | 10 June 2002 |
| Docket Number | No. 6628–00.,6628–00. |
| Citation | 118 T.C. 528,118 T.C. No. 32 |
| Parties | Charles H. ADDIS and Cindi Addis, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayer petitioned for redetermination of deficiencies arising from denial of charitable deduction for contribution in exchange for split-dollar life insurance policy. The Tax Court, Colvin, J., held that charity failed to fulfill substantiation requirements.
Decision for IRS. Steven Toscher and Michel R. Stein, for petitioners.
Lorraine Wu, for respondent.
Ps claimed charitable contribution deductions for their payments to NHF of $36,285 in 1997 and $36,000 in 1998. NHF, in turn, paid those amounts as premiums on a so-called charitable split-dollar life insurance policy on the life of P–W. NHF was entitled to receive 56 percent and Ps' family trust was entitled to receive 44 percent of the death benefit provided by the policy.
NHF was not required to pay the premiums for that policy. However, Ps reasonably expected NHF to do so because Ps' continued payments to NHF, and NHF's receipt of a death benefit, depended on NHF's paying the premiums.
NHF provided Ps with receipts for their payments which stated that NHF did not provide any goods or services to Ps in return for the payments. Ps claimed charitable contribution deductions for the entire amount of their payments to NHF.
Held: No part of Ps' payments to NHF is deductible as a charitable contribution to NHF because Ps did not meet the substantiation requirements of sec. 170(f)(8), I.R.C., and sec. 1.170A–13(f)(6), Income Tax Regs.
Respondent determined deficiencies in petitioners' Federal income tax of $13,062 for 1997 and $12,960 for 1998.
Petitioners claimed charitable contribution deductions for their payment to the National Heritage Foundation (NHF) of $36,285 in 1997 and $36,000 in 1998, which NHF used to pay premiums on a life insurance policy for the life of petitioner Cindi Addis (Mrs. Addis). The insurance policy for Mrs. Addis was a so-called charitable split-dollar life insurance contract, under which NHF was entitled to receive 56 percent of the death benefit and petitioners' family trust was entitled to receive 44 percent. Respondent disallowed petitioners' charitable contribution deductions for all of their payments to NHF.
The sole issue for decision is whether petitioners may deduct their payments to NHF as charitable contributions.1 We hold that they may not.
Unless otherwise indicated, section references are to the Internal Revenue Code. Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found.
A. Petitioners
Petitioners lived in Bakersfield, California, when they filed their petition in this case. Charles H. Addis (petitioner) has been a farm labor contractor in the Bakersfield area for the last 20 years.
B. Petitioners' Family Trust and Foundation1. The Addis Family Trust
On May 7, 1986, petitioners formed the Charles H. Addis Family Trust (Addis family trust). Petitioners are the trustors, first designee trustees, and initial beneficiaries of the Addis family trust. Under the trust instrument, petitioner's children and Mrs. Addis' parents or siblings become beneficiaries of the Addis family trust upon the deaths of petitioner and Mrs. Addis.
2. NHF
NHF is a section 501(c)(3) organization and is eligible to receive tax-deductible contributions under section 170(c)(2).
3. The Addis Family Foundation
On October 10, 1997, petitioners established a fund within NHF called the Addis family foundation. The purpose of the Addis family foundation is to fund Christian organizations and programs and individual evangelists. Mrs. Addis paid $285 to NHF to establish the Addis family foundation.
4. The Life Insurance Policy on Mrs. Addis
On October 10, 1997, petitioner wrote to Dr. J.T. Houk, the president of NHF, stating that the Addis family 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.
On October 15, 1997, the Commercial Union Life Insurance Co. of America (Commercial Union Life) issued a life insurance policy on the life of Mrs. Addis (the life insurance policy or the policy) to petitioner. Mrs. Addis was 44 years old at that time. Petitioners owned the policy through the Addis family trust.2
The life insurance policy had a $40,000 annual premium and an initial death benefit of $991,789.
5. The Death Benefit Option Agreement
On October 15, 1997, petitioner, as trustee of the Addis family trust, and NHF entered into a death benefit option agreement (DBOA) 3 relating to the life insurance policy on the life of Mrs. Addis. Petitioner agreed to pay $4,000 of the $40,000 annual premium on the life insurance policy. Petitioner and NHF agreed that, if NHF paid $36,000 of the annual premium, NHF would become entitled to $557,280 of the death benefit under that policy. The DBOA provides that the Addis family trust and NHF each own a separate interest in the life insurance policy. The DBOA remained in effect throughout 1998. 6. Petitioners' Payments to NHF and Commercial Union Life
Around November 12, 1997, petitioners sent a check for $36,000 to NHF for their family foundation. Petitioner's letter to NHF stated that NHF was not required to use the payment to pay the premium on the life insurance policy, but that petitioner expected NHF to use the $36,000 payment to pay those premiums. On November 13, 1997, petitioners paid Commercial Union Life their $4,000 portion of the $40,000 annual premium.
On November 19, 1997, NHF credited $36,000 to the Addis family foundation account. Simultaneously, NHF debited the Addis family foundation account $36,000 to pay NHF's portion of the life insurance policy premium. Also on that day, NHF paid its $36,000 portion of the life insurance policy premium to Commercial Union Life.
NHF sent a receipt for the 1997 contribution on behalf of the Addis family foundation which stated: “In accordance with IRS regulations, the National Heritage Foundation did not provide any goods or services to the donor in return for the contribution.”
On October 21, 1998, petitioners paid $36,000 to NHF. The payment was in form unrestricted. Also on that day, petitioners paid Commercial Union Life their $4,000 portion of the life insurance policy premium. On October 27, 1998, NHF credited the Addis family foundation account with $36,000 and debited the account in the same amount to pay NHF's portion of the premium for the life insurance policy. Also on that day, NHF paid its $36,000 portion of the life insurance policy premium to Commercial Union Life. NHF provided petitioners with a receipt which stated that NHF provided no goods or services to petitioners in exchange for the payment.
Petitioners would have stopped making payments to NHF if NHF had not used petitioners' $36,000 payments to pay the premiums for the life insurance policy on Mrs. Addis. 7. Rights Under the Commercial Union Life Insurance Policya. NHF's Rights
The life insurance policy had an initial death benefit of $991,789. Under the DBOA, NHF became entitled to $557,280 of that amount when it paid the $36,000 premium to Commercial Union Life in 1997. NHF's portion of the death benefit was fixed at $557,280, even if the total death benefit increased under the policy.
Under the DBOA, NHF was guaranteed to receive either: (1) $557,280 when Mrs. Addis died; or (2) the termination account or cash surrender value of the insurance policy if the policy was terminated before Mrs. Addis died. NHF was guaranteed to receive the termination account value upon termination of the policy, i.e., the cumulative amount of premiums paid by NHF, less the cumulative cost of insurance that NHF was charged for its share of the death benefit.
b. The Addis Family Trust's Rights
In 1997, petitioners' family trust was entitled to receive $434,509 4 of the death benefit. Under the DBOA, the Addis family trust could borrow against the life insurance policy only to the extent that the policy's cash surrender value 5 exceeded the termination account value. The policy's cash surrender value did not exceed its termination account value during the years in issue.
Under the DBOA, as long as the annual premium of $40,000 was paid, the Addis family trust was entitled to receive a death benefit of $434,509 plus any increase in the death benefit from the initial death benefit of $991,789.
Under the DBOA, the Addis family trust was required to pay the premiums on the policy if the cumulative premiums were inadequate to fund NHF's cost of insurance. 8. Enactment of Section 170(f)(10) in 1999
Petitioners stopped making payments to NHF after 1998. NHF no longer participates in charitable split-dollar life insurance arrangements because of the enactment in 1999 of section 170(f)(10),6 which requires charities to pay a 100–percent excise tax on certain life insurance premium payments.
C. Petitioners' Tax Returns and the Notice of Deficiency
Petitioners claimed deductions for charitable contributions to NHF of $36,285 in 1997 and $36,000 in 1998. Respondent determined in the notice of deficiency that petitioners are not entitled to those deductions.
OPINIONRespondent contends that (1) petitioners may not deduct any of their payments to NHF because petitioners received a benefit from NHF, and that (2) petitioners may not deduct any of their payments to NHF because petitioners did not comply with the substantiation requirement of section 170(f)(8) and section 1.170A–13(f)(6), Income Tax Regs. Respondent contends that the contemporaneous written acknowledgment by NHF of petitioners' payments (1) incorrectly states that NHF provided no goods or services in exchange for petitioners' payments, and (2) contains no description or good faith estimate of the value of the benefits petitioners received. To prevail on the charitable contributions issue, petitioners...
To continue reading
Request your trial
-
15 W. 17TH St. LLC v. Comm'r
...the property contributed reduced by the value of any consideration that the taxpayer receives in exchange for the gift. Addis v. Commissioner, 118 T.C. 528, 536 (2002), aff'd, 374 F.3d 881 (9th Cir. 2004). Payments to a charity that are "made partly as a contribution and partly in considera......
-
Cohan v. Comm'r of Internal Revenue
...under section 170(f)(8) when consideration the taxpayer received was not disclosed in the acknowledgment. See, e.g., Addis v. Commissioner, 118 T.C. 528 (2002), affd. 374 F.3d 881 (9th Cir. 2004). In Addis, the taxpayers claimed a charitable contribution deduction for payments to a charitab......
-
Dunlap v. Comm'r of Internal Revenue
...to claim a charitable contribution deduction larger than the one to which he or she would be entitled under section 170. Addis v. Commissioner, 118 T.C. 528, 537 (2002) (citing sections 1.170A-13(f)(7) and 1.170A-1(h)(4)(ii), Income Tax Regs.), aff'd, 374 F.3d 881 (9th Cir. 2004). In respon......
-
Gundanna v. Comm'r of Internal Revenue, 21355–03.
...in exchange for the donation, the deduction is disallowed in its entirety. Addis v. Commissioner, 374 F.3d 881 (9th Cir.2004), affg. 118 T.C. 528, 2002 WL 1284945 (2002). “The deterrence value of section 170(f)(8)'s total denial of a deduction comports with the effective administration of a......
-
Tax Court In Brief | Brooks v. Comm'r | Charitable Contribution Deductions For Conservation Easement; Contemporaneous Written Acknowledgment; Gross Valuation Misstatement
...must be disallowed.' Brooks, at pg. 12 (citing 26 U.S.C. ' 170(f)(8)(A); Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), aff'g 118 T.C. 528 Baseline Document Requirements of Treasury Regulation ' 1.170A-14(g)(5). The deduction for charitable contributions shall be allowed only if ......