Charles H. Addis and Cindi Addis v. Commissioner ( 2002 )

118 T.C. No. 32UNITED STATES TAX COURT
CHARLES H. ADDIS AND CINDI ADDIS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6628-00. Filed June 10, 2002.
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.
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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.
Steven Toscher and Michel R. Stein, for petitioners.
Lorraine Wu, for respondent.
COLVIN, Judge: 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.
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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.
FINDINGS OF FACT
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 Foundation
1. 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.
1
Petitioners contend that sec. 7491(a) requires respondent
to bear the burden of proof on all issues in the case. We need
not decide petitioners’ contention because our findings and
analysis do not depend on which party bears the burden of proof.
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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.
2
Petitioners possess rights in the insurance policy solely
through the Addis family trust.
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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
3
The DBOA is also referred to as a charitable split-dollar
life insurance transaction.
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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.
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7. Rights Under the Commercial Union Life Insurance Policy
a. 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
$434,5094 of the death benefit. Under the DBOA, the Addis family
trust could borrow against the life insurance policy only to the
4
Lawrence D. Cronin, the president of Cronin Insurance
Services, testified that petitioners’ family trust was entitled
to receive $424,509. The initial death benefit was $991,789.
NHF was entitled to receive $557,280 of that amount, and
petitioners’ family trust was entitled to receive the remainder.
The difference between $991,789 and $557,280 is $434,509.
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extent that the policy’s cash surrender value5 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.
5
A policy’s cash surrender value is its total gross cash
value less any surrender charges imposed by the insurer on the
surrender of the policy.
6
Sec. 170(f)(10) was added to the Code by sec. 537(a) of
the Ticket to Work and Work Incentives Improvement Act of 1999,
Pub. L. 106-170, 113 Stat. 1860, 1936, generally effective for
transfers after Feb. 8, 1999.
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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.
OPINION
Respondent 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 must overcome both of
respondent’s arguments. We will first consider respondent’s
second argument.
A. Substantiation Requirement Under Section 170(f)(8)
A taxpayer may not deduct any contribution of $250 or more
unless he or she substantiates the contribution with a
contemporaneous written acknowledgment of the contribution by the
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donee organization that meets the requirements of section
170(f)(8)(B).7 Sec. 170(f)(8)(A). The donee’s written
acknowledgment must state the amount of cash and describe other
property contributed, indicate whether the donee organization
provided any goods or services in consideration for the
contribution, and provide a description and good faith estimate
of the value of any goods or services8 provided by the donee
organization. Sec. 170(f)(8)(B).
7
Sec. 170(f)(8) provides in part:
(A) General rule.--No deduction shall be allowed
under subsection (a) for any contribution of $250 or
more unless the taxpayer substantiates the contribution
by a contemporaneous written acknowledgment of the
contribution by the donee organization that meets the
requirements of subparagraph (B).
(B) Content of acknowledgment.--An acknowledgment
meets the requirements of this subparagraph if it
includes the following information:
(i) The amount of cash and a description
(but not value) of any property other than
cash contributed.
(ii) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for any
property described in clause (i).
(iii) A description and good faith
estimate of the value of any goods or
services referred to in clause (ii) * * *.
8
Goods or services include cash, property, services,
benefits, and privileges. Sec. 1.170A-13(f)(5), Income Tax Regs.
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B. Definition of Consideration Under Section 1.170A-13(f)(6),
Income Tax Regs.
Petitioners contend that they did not receive consideration
for, i.e., that they did not receive goods or services in
exchange for, their $36,000 payments to NHF because NHF was not
required to use those payments to pay the premiums on the life
insurance policy. Petitioners contend that the fact that they
expected NHF to invest in the life insurance policy was not
consideration for purposes of section 170(f)(8). We disagree.
A donee organization provides goods or services in
consideration for a taxpayer’s payment if, at the time the donor
makes the payment to the donee organization, the taxpayer
receives or expects to receive goods or services in exchange for
that payment. Section 1.170A-13(f)(6), Income Tax Regs.,
provides:
(6) In consideration for. A donee organization
provides goods or services in consideration for a
taxpayer’s payment if, at the time the taxpayer makes
the payment to the donee organization, the taxpayer
receives or expects to receive goods or services in
exchange for that payment. * * *
Section 1.170A-13(f)(6), Income Tax Regs., is in keeping
with the traditional view that a charitable contribution is one
for which the donor has “‘no expectation of any quid pro quo’”.
Hernandez v. Commissioner, 490 U.S. 680, 690 (1989) (quoting S.
Rept. 1622, 83d Cong., 2d Sess. 196 (1954); H. Rept. 1337, 83d
Cong., 2d Sess. A44 (1954) (the legislative history defines a
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gift as a payment “made with no expectation of a financial return
commensurate with the amount of the gift”)); see also United
States v. Am. Bar Endowment, 477 U.S. 105, 116, 118 (1985) (“The
sine qua non of a charitable contribution is a transfer of money
or property without adequate consideration.”).
NHF used petitioners’ $36,000 payments to pay the premiums
on the life insurance policy, $434,509 (or 44 percent of the
death benefits) of which petitioners’ family trust was entitled
to receive as beneficiary.
Petitioners point out that NHF was not required, and did not
promise, to use their contributions to pay the premiums on the
insurance policy on the life of Mrs. Addis. However, NHF
provided consideration for petitioners’ payments because, at the
time petitioners made payments to NHF, they expected to receive
44 percent of the death benefit under the policy. Petitioners
expected NHF to use their $36,000 contributions to pay NHF’s
portion of the premiums on the life insurance policy in 1997 and
1998. Sec. 1.170A-13(f)(6), Income Tax Regs. Petitioners’
expectation that NHF would pay the premiums on the life insurance
policy was reasonable because it was in NHF’s financial interest
to pay premiums on petitioners’ life insurance policy in return
for a guaranteed death benefit of $557,280.
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C. Whether NHF’s Receipts for Petitioners’ Payments Comply With
Section 170(f)(8) and Section 1.170A-13(f)(6), Income Tax
Regs.
Petitioners contend that NHF’s receipts comply with section
170(f)(8) and were contemporaneous written acknowledgments of
their contributions. They further contend that the receipts were
accurate because they received no benefits in exchange for their
payments to NHF. Petitioners’ contention fails to take into
account the definition of consideration in section 1.170A-
13(f)(6), Income Tax Regs. As stated above, under that
regulation, a donee organization provides goods or services in
consideration for a taxpayer’s payment if, at the time the
taxpayer makes the payment to the donee organization, the
taxpayer receives or expects to receive goods or services in
exchange for that payment.
NHF did not state in its receipts that NHF paid premiums for
the insurance policy on the life of Mrs. Addis under which
petitioners would receive 44 percent of the death benefits. NHF
failed to make a good faith estimate of the value of those
benefits as required by section 170(f)(8)(B)(iii).
The legislative history accompanying the enactment of
section 170(f)(8) states: “Organizations * * * [that provide
goods or services in consideration for payments from donors]
often do not inform their donors that all or a portion of the
amount paid by the donor may not be deductible as a charitable
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contribution.” H. Rept. 103-111, at 783, 785 (1993), 1993-3 C.B.
167, 359, 361. Congress enacted the substantiation requirements
of section 170(f)(8) to require charitable organizations that
receive quid pro quo contributions, i.e., payments made partly as
a contribution and partly in consideration for goods or services
provided to the donor by the donee organization, to inform their
donors that the deduction under section 170 is limited to the
amount by which the payment exceeds the value of goods or
services provided by the charity. Id.Petitioners and NHF designed a scheme purporting to provide
no benefits to petitioners in exchange (or consideration) for
petitioners’ payments. However, petitioners received substantial
benefits from NHF under the life insurance policy. In the
documents structuring this transaction, petitioners and NHF
avoided stating any obligation of NHF and made it appear that
petitioners made an outright gift to NHF with no quid pro quo.
However, petitioners expected, and they told NHF that they
expected, NHF to use their contributions for both their and NHF’s
benefit.
Petitioners and NHF both had incentives to proceed under
this scheme; with the pot sweetened by charitable contribution
deductions, it was in both parties’ interests (1) for NHF to
continue to pay the insurance premiums, and (2) for petitioners
to continue to make payments to NHF. NHF would be entitled to
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the $557,000 death benefit only if it paid the premiums for the
life insurance policy. We conclude that the NHF receipts do not
comply with the substantiation requirement of section 170(f)(8)
and section 1.170A-13(f)(6), Income Tax Regs., because NHF
incorrectly stated in the receipts that petitioners received no
consideration for their payments.
D. Consequence of Failure To Comply With Section 170(f)(8)
Section 170(f)(8) disallows a charitable contribution
deduction in circumstances such as these, where the donee
organization’s contemporaneous written acknowledgment is
erroneous and is not a good faith estimate of the value of goods
or services it provided, and where the taxpayer unquestioningly
and self-servingly uses that erroneous statement to claim a
charitable contribution larger than the one to which he or she
would be entitled under section 170. Secs. 1.170A-13(f)(7),
1.170A-1(h)(4)(ii), Income Tax Regs. The written acknowledgments
by NHF did not meet the requirements of section 170(f)(8) and
section 1.170A-13(f)(6), Income Tax Regs. Thus, petitioners may
not deduct their contributions to NHF of $36,285 in 1997 and
$36,000 in 1998.
To reflect the foregoing,
Decision will be entered
for respondent.