Contents

RECEIPT, RECORDKEEPING, AND REPORTING REQUIREMENTSNHF agreed that if NHF paid $36,000 of the annual premium, NHF would beentitled to its share of the death benefit. The agreement provided that the familytrust and NHF each own a separate interest in this life insurance policy.Later in 1997, H and W sent money ($36,000) to NHF for deposit into theirfoundation. An accompanying letter from H stated that NHF was not requiredto use the payment to pay the premium on the life insurance policy, but that H“expected” NHF to use the payment to pay the premium. The next day, the couplepaid their $4,000 of the premium. NHF credited $36,000 to the foundationaccount. It simultaneously debited the foundation account $36,000 to pay NHF’sportion of the life insurance policy premium. Also on the same day, NHF paid its$36,000 portion of the premium to the insurance company. The same series oftransactions occurred the next year. As to both years, NHF provided the couplewith a document stating that NHF had not provided any goods or services to thedonors in return for the contribution.The couple stopped making payments to NHF after 1998. The statute thatwas designed to shut down these programs 70 took effect for transfers after February8, 1999. The IRS disallowed the charitable contribution deductions claimedby the couple for the transfers to NHF in 1997 and 1998.The couple argued, of course, that NHF was not required, and did not promise,to use the contributions to pay the premiums on the insurance policy on thelife of W. The court held, however, that NHF “provided consideration” for thepayments because, at the time the payments were made to NHF, the couple“expected” to receive a share of the death benefit under the policy. 71 Also, they“expected” NHF to use the funds they provided to pay NHF’s portion of the premiumson the policy in 1997 and 1998. 72 This “expectation” on the part of thecouple was deemed “reasonable” by the court because it was in NHF’s financialinterest to pay premiums on the couple’s life insurance policy in return for aguaranteed death benefit. 73NHF did not state in its substantiation documents that it had paid premiumsfor the insurance policy on the life of W under which the couple would receive aportion of the death benefit. Also, NHF failed to make a good faith estimate ofthe value of these benefits. This arrangement was characterized by the court as a“scheme,” including a “pot sweetened by charitable contribution deductions.” 74The court held that the charitable contribution deduction was not available tothis couple because the substantiation provided by the charitable donee wasdeficient. 7570 See § 17.6(c).71 Addis v. Commissioner, 118 T.C. 528, 536 (2002), aff'd, 2004-2 U.S.T.C 50,291(9th Cir. 2004).72 Id. 118 T.C. at 536.73 Id. 118 T.C. at 535.74 Id. 118 T.C. at 536.75 In this opinion, the Tax Court equated a donor’s expectation with the statutory requirement of a good or service.See § 21.1(b)(ii), text accompanied by note 32. Donors make charitable contributions with expectations all thetime, such as in the case of gifts to donor-advised funds. Charities must be ever so cautious in preparing thesubstantiation documents, because now—if this interpretation of the law by the Tax Court holds—charities notonly must value any goods and services they provided in consideration for a gift, they must also peer into themisty reaches of donor motivation and intent to discern what a donor expects to be provided, and value that. 594