Contents
Contents Contents
§ 21.1 SUBSTANTIATION AND OTHER RECEIPT REQUIREMENTSmay act as the charitable donee’s agent. 64 The IRS approved of an arrangementwhereby a charitable organization that engaged in the solicitation, processing,and sale of donated vehicles denominated a for-profit corporation that was in thebusiness of buying, maintaining, dismantling, and selling used vehicles as the charity’sagent for the acceptance of contributed vehicles. 65To reiterate, these rules apply with respect to the making of contributions; thedonor’s deduction is not available unless there is full compliance with the rules.By making the requisite acknowledgment, the charitable organization involvedis acquiescing in or concurring with the donor’s position that the payment is infact a contribution. There may, however, be an issue as to whether the paymentis a gift. 66 A charitable organization that certifies in this fashion that a payment isa gift, when the transaction is not in law a gift, may be subject to one or more taxpenalties, such as for participating in an understatement of income tax or promotionof a tax shelter. 67Court’s Interpretation of Rules. The U.S. Tax Court ruled that payments madeto a charitable organization were not deductible as charitable gifts, because thesubstantiation requirements were not met, in that there was an undisclosedreturn benefit. 68 The amounts received by the charity were used to acquire acharitable split-dollar life insurance policy. The court held that there was a reasonableexpectation that the charity would purchase the policy, which includeda death benefit to one of the donors. The deduction was denied because thisexpectation was not disclosed and made the subject of a good faith estimate inthe substantiation documents.This case concerned a married couple (H and W) who claimed charitable contributiondeductions for their payments of money (in 1997 and 1998) to theNational Heritage Foundation (NHF), which NHF used to pay premiums on alife insurance policy for the life of W. The policy was a charitable split-dollar lifeinsurance contract. 69 Under this contract, NHF was entitled to receive 56 percentof the death benefit and the couple’s family trust was entitled to receive 44 percentof the benefit. Eleven years before the first of these payments, the coupleformed a family trust. They are the trustors, first designee trustees, and initialbeneficiaries of this trust. Their children and W’s parents or siblings becomebeneficiaries of the trust on the death of the couple.In October 1997, H and W established a “foundation” (a donor-advisedfund) within NHF. On the same day, H wrote to NHF stating that the familytrust intended to purchase an insurance policy on the life of W and would grantNHF an option to acquire an interest in that policy. The policy was issued. Thecouple owned the policy through the trust. H, as trustee of the trust, and NHFentered into a death benefit option agreement relating to the policy. H agreed topay $4,000 of the $40,000 annual premium on the life insurance policy. H and64 Rev. Rul. 2002-67, 2002-47 I.R.B. 873.65 Priv. Ltr. Rul. 200230005.66 See §§ 3.1, 9.15, 9.16(a).67 See § 10.14.68 Addis v. Commissioner, 118 T.C. 528 (2002), aff'd, 2004-2 U.S.T.C 50,291(9th Cir. 2004).69 See § 17.6. 593
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- Page 1278: 23CHAPTER TWENTY-THREESpecial Event
§ 21.1 SUBSTANTIATION AND OTHER RECEIPT REQUIREMENTSmay act as the charitable donee’s agent. 64 The IRS approved of an arrangementwhereby a charitable organization that engaged in the solicitation, processing,and sale of donated vehicles denominated a for-profit corporation that was in thebusiness of buying, maintaining, dismantling, and selling used vehicles as the charity’sagent for the acceptance of contributed vehicles. 65To reiterate, these rules apply with respect to the making of contributions; thedonor’s deduction is not available unless there is full compliance with the rules.By making the requisite acknowledgment, the charitable organization involvedis acquiescing in or concurring with the donor’s position that the payment is infact a contribution. There may, however, be an issue as to whether the paymentis a gift. 66 A charitable organization that certifies in this fashion that a payment isa gift, when the transaction is not in law a gift, may be subject to one or more taxpenalties, such as for participating in an understatement of income tax or promotionof a tax shelter. 67Court’s Interpretation of Rules. The U.S. Tax Court ruled that payments madeto a charitable organization were not deductible as charitable gifts, because thesubstantiation requirements were not met, in that there was an undisclosedreturn benefit. 68 The amounts received by the charity were used to acquire acharitable split-dollar life insurance policy. The court held that there was a reasonableexpectation that the charity would purchase the policy, which includeda death benefit to one of the donors. The deduction was denied because thisexpectation was not disclosed and made the subject of a good faith estimate inthe substantiation documents.This case concerned a married couple (H and W) who claimed charitable contributiondeductions for their payments of money (in 1997 and 1998) to theNational Heritage Foundation (NHF), which NHF used to pay premiums on alife insurance policy for the life of W. The policy was a charitable split-dollar lifeinsurance contract. 69 Under this contract, NHF was entitled to receive 56 percentof the death benefit and the couple’s family trust was entitled to receive 44 percentof the benefit. Eleven years before the first of these payments, the coupleformed a family trust. They are the trustors, first designee trustees, and initialbeneficiaries of this trust. Their children and W’s parents or siblings becomebeneficiaries of the trust on the death of the couple.In October 1997, H and W established a “foundation” (a donor-advisedfund) within NHF. On the same day, H wrote to NHF stating that the familytrust intended to purchase an insurance policy on the life of W and would grantNHF an option to acquire an interest in that policy. The policy was issued. Thecouple owned the policy through the trust. H, as trustee of the trust, and NHFentered into a death benefit option agreement relating to the policy. H agreed topay $4,000 of the $40,000 annual premium on the life insurance policy. H and64 Rev. Rul. 2002-67, 2002-47 I.R.B. 873.65 Priv. Ltr. Rul. 200230005.66 See §§ 3.1, 9.15, 9.16(a).67 See § 10.14.68 Addis v. Commissioner, 118 T.C. 528 (2002), aff'd, 2004-2 U.S.T.C 50,291(9th Cir. 2004).69 See § 17.6. 593