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§ 17.6 CHARITABLE SPLIT-DOLLAR INSURANCE PLANSfor certain noncharitable recipients of an annuity or unitrust amount paid by acharitable remainder trust.No Inference. No inference is intended that a charitable contribution deductionwas allowed under preexisting law with respect to a charitable split-dollarinsurance arrangement. The legislation did not change the rules with respect tofraud, or civil or criminal penalties under existing law.(c) IRS NoticeThe IRS issued a notice 66 to “alert” taxpayers and charitable organizations about“certain” charitable split-dollar insurance transactions that “purport” to giverise to federal income and gift tax charitable contribution deductions. The IRSadvised these persons that “these transactions will not produce the tax benefitsadvertised by their promoters.” The IRS added that promoters of these transactions,and those participating in them (including charities), “may be subject toother adverse tax consequences, including penalties.”The IRS said that, in instances of these transactions, it will apply the substance-over-formdoctrine. This means that the IRS rejects the contention that thefunds transferred to a charity constitute unrestricted gifts, on the ground that noobligation legally binds the charity to make the insurance investment—that is, topay the policy premiums with the funds. Instead, the IRS presumes a “mutualunderstanding” between the taxpayer, the charity, and any other related intermediary(such as a life insurance trust).Thus, the IRS will treat such a transaction as one in which the taxpayerobtains an insurance policy, pays premiums with respect to the policy, and transferssome of the rights under that policy to the intermediary entity and theremaining rights to charity. A person in this context is treated as dividing therights in the insurance policy between the trust and charity. This is cast as a violationof the partial-interest gift rules, 67 causing disallowance of the charitablededuction. (The argument against application of the partial interest rule is thatthe donor is not a party to the split-dollar arrangement with the charity.)The IRS stated that this notice applies to any charitable split-dollar insurancetransaction, regardless of whether a trust or some other type of relatedintermediary is used in the transaction. 68Here are the potential sanctions—a formidable array, to be sure—profferedby the IRS:• Challenge to the tax-exempt status of a participating charity on the basisof private inurement• Challenge to the tax-exempt status of a participating charity on theground of impermissible private benefit66 Notice 99-36, 1999-1 C.B. 1284.67 See § 9.23.68 Not every split-dollar life insurance arrangement is encompassed by this notice and IRC § 170(f)(10). For example,the IRS ruled that such an arrangement, involving a private foundation and its chief executive officer,included as part of a comprehensive compensation package for him, did not constitute a transgression of therules outlawing certain charitable split-dollar insurance plans. Priv. Ltr. Rul. 200020060. 543