[Congressional Record Volume 145, Number 23 (Tuesday, February 9, 1999)]
[Extensions of Remarks]
[Page E161]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E161]]



         A BILL TO HALT CHARITABLE SPLIT-DOLLAR LIFE INSURANCE

                                 ______
                                 

                            HON. BILL ARCHER

                                of texas

                    in the house of representatives

                       Tuesday, February 9, 1999

  Mr. ARCHER. Mr. Speaker, today Congressman Rangel and I are 
introducing H.R. 630, legislation designed to stop the spread of an 
abusive scheme referred to as charitable split-dollar life insurance. 
Under this scheme, taxpayers transfer money to a charity, which the 
charity then uses to pay premiums for life insurance on the transferor 
or another person. The beneficiaries under the life insurance contract 
typically include members of the transferor's family (either directly 
or through a family trust or family partnership). Having passed the 
money through a charity, the transferor claims a charitable 
contribution deduction for money that is actually being used to benefit 
the transferor and his or her family. If the transferor or the 
transferor's family paid the premium directly, the payment would not be 
deductible. Although the charity eventually may get some of the benefit 
under the life insurance contract, it does not have unfettered use of 
the transferred funds.
  We are concerned that this type of transaction represents an abuse of 
the charitable contribution deduction. We are also concerned that the 
charity often gets relatively little benefit from this type of scheme, 
and serves merely as a conduit or accommodation party, which we do not 
view as appropriate for an organization with tax-exempt status. While 
there is no basis under present law for allowing a charitable 
contribution deduction in these circumstances, we intend that the 
introduction of this bill stop the marketing of these transactions 
immediately.
  Therefore, our bill clarifies present law by specifically denying a 
charitable contribution deduction for a transfer to a charity if the 
charity directly or indirectly pays or paid any premium on a life 
insurance, annuity or endowment contract in connection with the 
transfer, and any direct or indirect beneficiary under the contract is 
the transferor, any member of the transferor's family, or any other 
noncharitable person chosen by the transferor. In addition, the bill 
clarifies present law by specifically denying the deduction for a 
charitable contribution if, in connection with a transfer to the 
charity, there is an understanding or exception that any person will 
directly or indirectly pay any premium on any such contract. Further, 
the bill imposes an excise tax on the charity, equal to the amount of 
the premiums paid by the charity. Finally, the bill requires a charity 
to report annually to the Internal Revenue Service the amount of 
premiums subject to this excise tax and information about the 
beneficiaries under the contract.

                         Technical Explanation


                            Deduction denial

       Specifically, the bill provides that no charitable 
     contribution deduction is allowed for purposes of Federal 
     tax, for a transfer to or for the use of an organization 
     described in section 170(c) of the Internal Revenue Code, if 
     in connection with the transfer (1) the organization directly 
     or indirectly pays, or has previously paid, any premium on 
     any ``personal benefit contract'' with respect to the 
     transferor, or (2) there is an understanding or expectation 
     that any person will directly or indirectly pay any premium 
     on any ``personal benefit contract'' with respect to the 
     transferor. It is intended that an organization be considered 
     as indirectly paying premiums if, for example, another person 
     pays premiums on its behalf.
       A personal benefit contract with respect to the transferor 
     is any life insurance, annuity, or endowment contract, if any 
     direct or indirect beneficiary under the contract is the 
     transferor, any member of the transferor's family, or any 
     other person (other than a section 170(c) organization) 
     designated by the transferor. For example, such a beneficiary 
     would include a trust having a direct or indirect beneficiary 
     who is the transferor or any member of the transferor's 
     family, and would include an entity that is controlled by the 
     transferor or any member of the transferor's family. It is 
     intended that a beneficiary under the contract include any 
     beneficiary under any side agreement relating to the 
     contract. If a transferor contributes a life insurance 
     contract to a section 170(c) organization and designates one 
     or more section 170(c) organizations as the sole 
     beneficiaries under the contract, generally, it is not 
     intended that the deduction denial rule under the bill apply. 
     If, however, there is an outstanding loan under the contract 
     upon the transfer of the contract, then the transferor is 
     considered as a beneficiary. The fact that a contract also 
     has other direct or indirect beneficiaries (persons who are 
     not the transferor or a family member, or designated by the 
     transferor) does not prevent it from being a personal benefit 
     contract. The bill is not intended to affect situations in 
     which an organization pays premiums under a legitimate fringe 
     benefit plan for employees.
       It is intended that a person be considered as an indirect 
     beneficiary under a contract if, for example, the person 
     receives or will receive any economic benefit as a result of 
     amounts paid under or with respect to the contract. For this 
     purpose, an indirect beneficiary is not intended to include a 
     person that benefits exclusively under a bona fide charitable 
     gift annuity (within the meaning of sec. 501(m) (or a bona 
     fide reinsurance arrangement with respect to such a 
     charitable gift annuity)). Because we understand that a 
     charitable gift annuity ordinarily does not involve a 
     contract issued by an insurance company, the bill does not 
     provide for special treatment of charitable gift annuities.


                               Excise tax

       The bill imposes on any organization described in section 
     170(c) of the Code an excise tax, in the amount of the 
     premiums paid by the organization on any life insurance, 
     annuity, or endowment contract, if the payment of premiums on 
     the contract is in connection with a transfer for which a 
     deduction is not allowable under the deduction denial rule of 
     the provision. The excise tax does not apply if all of the 
     direct and indirect beneficiaries under the contract 
     (including any related side agreement) are organizations 
     described in section 170(c). Under the bill, payments are 
     treated as made by the organization, if they are made by any 
     other person pursuant to an understanding or expectation of 
     payment.


                               Reporting

       The bill requires that the organization annually report the 
     amount of premiums that is paid during the year and that is 
     subject to the excise tax imposed under the provision, and 
     the name and taxpayer identification number of each 
     beneficiary under the contract to which the premiums relate, 
     as well as other information required by the Secretary of the 
     Treasury. For this purpose, it is intended that a beneficiary 
     include the beneficiary under any side agreement to which the 
     section 170(c) organization is a party (or of which it is 
     otherwise aware). Penalties applicable to returns required 
     under Code section 6033 apply to returns under this reporting 
     requirement. Returns required under this provision are to be 
     furnished at such time and in such manner as the Secretary 
     shall by forms or regulations require.


                              Regulations

       The bill provides for the promulgation of regulations 
     necessary to carry out the purposes of the provisions.


                             Effective date

       The deduction denial provision of the bill applies to 
     transfers after February 8, 1999. The excise tax provision of 
     the bill applies to premiums paid after the date of 
     enactment. The reporting provision applies to premiums (that 
     would be subject to the excise tax were it then effective) 
     paid after February 8, 1999.
       No inference is intended that a charitable contribution 
     deduction is allowed under present law in the circumstances 
     to which this bill applies. The bill does not change the 
     rules with respect to fraud or criminal or civil penalties 
     under present law; thus, actions constituting fraud or that 
     are subject to penalties under present law would still 
     constitute fraud or be subject to the penalties after 
     enactment of the bill.

     

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